Zebra
Annual Report 2008

Plain-text annual report

We help our customers Zebra Technologies Corporation 2008 Annual Report Identify Track Manage Zebra Technologies improves its customers’ business performance with products and solutions that identify, track and manage assets, transactions and people. We help our customers track their critical assets smarter. Industry-leading specialty digital printing and automatic identification solutions enhance supply chain visibility, optimize asset flow and deliver a rapid investment payback. Business, government and other organizations use our on-demand thermal printers and supplies, radio frequency identification (RFID) solutions, real time locating systems (RTLS) and mission-critical supply chain execution solutions to deliver better customer service, increase productivity and strengthen security. Our commitment to industry leadership, financial strength and growth helps Zebra build long-term value for customers, partners and stockholders. F i n a n C i a l S u m m a R y (In thousands, except per-share data and percentages) 2008 % change 2007 % change 2006 Operating Results Net sales $ 976,700 12.5% $ 868,279 Gross profit 479,305 14.9 Operating income (loss) Net income (loss) (15,346) (38,421) Basic earnings (loss) per share (0.60) Diluted earnings (loss) per share (0.60) – – – – 417,118 143,185 110,113 1.61 1.60 14.3% 16.4 78.0 55.2 59.4 60.0 $ 759,524 358,420 80,429 70,946 1.01 1.00 Capitalization Cash & cash equivalents and investments and marketable securities (current and long-term) Working capital Total assets Stockholders’ equity – = Not meaningful $ 224,886 271,831 850,878 710,738 $ 281,179 298,660 1,034,278 902,693 $ 559,189 404,836 963,142 877,681 Secure, positive identification helps protect employees, visitors, patrons and residents, as well as property and assets. Zebra solutions deliver automated, on-demand production of highly customized cards, badges and wrist bands. Features such as bar codes, magnetic stripes, and radio frequency identification (RFID) smart card technology enhance security and expand the range of applications. Identify Track Manage PeopleCard identity solutions provide positive personal identification, from employee ID cards and visitor badges to driver’s licenses and national ID cards. Zebra technology and materials make it easy to produce clear, customized, tamper-resistant cards right at the point of issuance. Patient wristbands from Zebra are a cornerstone of healthcare safety. Hospital admissions staff can immediately produce barcoded, antimicrobial, long-lasting wristbands to identify patients. The wristbands support safe medication administration and bedside specimen collection to reduce errors, improve patient outcomes and increase staff productivity. Smart card solutions used by leading ski mountain operators enhance the customer experience by speeding patrons through lift lines. From small businesses to military and government agencies, organizations use Zebra solutions to manage access privileges, track visitors and enhance personal security. Effective asset management reduces losses, increases productivity and improves profits. Zebra solutions increase asset visibility at every step along today’s complex global supply chains. Businesses worldwide rely on our solutions to quickly and accurately determine asset location, condition and availability. Identify Track Manage AssetsManufacturing, distribution and retail operations count on the suite of Zebra solutions to improve inventory turnover and lower working capital requirements. Barcoding, radio frequency identification (RFID) and real time locating systems (RTLS) from Zebra help ensure that the right items, in the right quantity, are correctly shipped, received and processed. Airports and airlines optimize ground support through Zebra solutions that track vehicles on the tarmac. Greater visibility into the vehicle operating matrix—knowing who’s using a vehicle, where and how—helps cut costs, mitigate risk, improve efficiency and shrink the carbon footprint. Pharmacies use Zebra thermal printers to streamline workflow and improve customer service. Dedicated label printers are fast and compact and perform at a lower overall cost. Barcoding helps pharmacists reconcile patient and prescription information and better manage inventories. Zebra mobile and desktop printers add convenience and accuracy to every transaction. Our solutions interface in real time with handheld computers and wireless networks for on-the-spot receipt printing, payment processing and returns management. Faster, more accurate transaction processing improves customer service, cuts cash collection time and increases productivity of workers in the field. Identify Track Manage TransactionsSmall package delivery and route sales representatives can use Zebra printers on the road, in the truck or at customer locations for quick and reliable printing of receipts, invoices and work orders. Our mobile solutions increase order and invoice accuracy, shorten billing cycles and improve employee productivity—for more efficient, profitable operations. Law enforcement and public safety officers use Zebra mobile printers for ticketing and in-field evidence tracking. Field personnel can quickly enter and verify data, enhancing emergency response while improving enforceability and personnel safety. Retailers streamline operations from the back office to point of sale with Zebra printing solutions. Accurate product and shelf labeling saves labor, improves inventory management and speeds customer transactions. l e T T e R T O S T O C k h O l d e R S Anders Gustafsson, Chief Executive Officer Zebra reported solid results for 2008, despite an increasingly difficult operating environment. We extended our industry leadership by delivering more high-value solutions to help customers identify, track and manage critical assets through increasingly complex supply chains. Equally important, we maintained our historically strong balance sheet, with $225 million in cash and no debt, even after deploying $158 million for share buybacks. The resilience of our business – with our diversified customer base, global reach, wide range of products and solutions, and the industry’s strongest go-to- market channel network – helped grow sales 12.5%, to a record $976.7 million. In 2008, our growth was aided by: • Our industry-leading product base and continued penetration of attractive industries, including healthcare, government, and mobile workforce • New products and solutions, including self-service kiosk applications, wristbands and wristband printers for improved patient safety and more effective card printer solutions, for increased sales to new and established customers • Expansion into new areas of profitable growth such as marine terminal operating systems and asset tracking systems for airport ground support vehicles, through our Zebra Enterprise Solutions (ZES) group The difficult economic conditions that affected most companies as the year unfolded also affected Zebra. For 2008, we recorded $157 million in non-cash impair- ment charges, primarily related to the economy’s effect on ZES and the near-term business outlook. While ZES is taking longer than projected to meet target metrics, its value proposition remains compelling. ZES enhances our core specialty printing business by making Zebra a more impor- tant strategic partner to more customers in more industries, thanks to a portfolio of integrated, high-value solutions. As the only well-capitalized company with such a broad set of asset tracking solutions, Zebra is uniquely positioned to meet customers’ needs well into the future. aggressive Focus on Performance In 2008, we responded early and aggressively to the economic downturn, reducing costs and improving organizational efficiency. This action has allowed us to carefully navigate the current environment and positions Zebra for enhanced performance when conditions improve. Our initiatives included: Our work during 2008 has positioned Zebra to increase shareholder value, striking an appropriate balance between preserving near-term profitability and driving long-term growth. In good times and bad, customers choose Zebra solutions because we deliver measurable business improvement and rapid investment payback. • Reorganizing business functions While uncertainty in the global to drive efficiency and strengthen our global brand • Giving priority to projects with the highest, most immediate investment returns • Streamlining product offerings to improve efficiency and profitability economy presents a challenging outlook for 2009, Zebra is well-positioned to enhance shareholder returns over the long term. We have made the right choices to preserve profitability and extend industry leadership, deploying resources to achieve the highest risk- We also advanced our global adjusted returns. We remain supply chain strategy to reduce nimble in adapting to changing product costs, improve respon- business conditions. siveness and tighten inventory management. Our multi-year During challenging economic investment in a new enterprise times, all companies look for resource planning system is ways to improve their business another strategic project that will processes. Zebra’s solutions help us enhance customer service help them do that. The diversity and improve business processes. of our business, across partners, customers, products and Investments to improve our geographies, positions Zebra to competitiveness are also vital. pursue a broader range of We are focusing resources where we see opportunities for the highest risk-adjusted prospects. Our knowledgeable and dedicated employees give me the confidence that Zebra returns, including: will succeed. • Developing new products to extend our range and help our customers reduce operating costs by improving supply chain visibility, customer service and security • Enhancing our award-winning channel partner programs • Targeting more immediate business opportunities in attractive industries • Deepening our strongest customer relationships anders Gustafsson Chief Executive Officer Comparison of Five-Year Cumulative Total Return of Zebra Technologies Corporation, the Hemscott Industry Group 815 Index and the NASDAQ Composite Market Index Stock Performance Graph This graph compares the cumulative annual change since December 31, 2003, of the total stockholder return on Zebra Technologies Corporation Class A Common Stock with the cumulative total return on the following published indices: (i) the Hemscott Industry Group 815 (Computer Peripherals) Index1 and (ii) the NASDAQ Composite Market Index, during the same period. This comparison assumes that $100 was invested in each of the Company’s Class A Common Stock, the stocks comprising the Hemscott Industry Group 815 Index, and the stocks comprising the NASDAQ Composite Market Index, on December 31, 2003, and assumes that all dividends were reinvested at the end of the month in which they were paid. 2003 2004 2005 2006 2007 2008 Zebra Technologies Corporation Hemscott Industry Group Index NASDAQ Composite Market Index $ 100.00 $127.13 $ 96.80 $ 78.59 $ 78.38 $45.77 100.00 102.24 88.36 96.62 100.74 49.55 100.00 108.41 110.79 122.16 134.29 79.25 1. Hemscott, Inc. (formerly CoreData LLC and Media General Financial Services) publishes the Hemscott Industry Group 815 (Computer Peripherals) Index. The index is composed of the following companies: Acorn Energy Inc., Aruba Networks Inc., Astro-Med Inc., AU Optronics Corp. ADS, Avocent Corp., Electronics For Imaging, Emulex Corp., Evans & Sutherland Computer Corp., Hauppage Digital Inc., iCAD Inc., iGo Inc., Immersion Corp., InFocus Corp., Intermec Inc., Interphase Corp., Key Tronic Corp., Lantronix Inc., Lexmark International Inc., Logitech International SA ADR, Media Sciences International Inc., Mercury Computer Systems Inc., MTS Medication Technologies Inc., Nice Systems Ltd. ADR, O2Micro International Ltd., Opnet Technologies Inc., Planar Systems Inc., Radcom Ltd., RadiSys Corp., Rimage Corp., SCM Microsystems Inc., Stratasys Inc., Top Image Systems Ltd., Transact Technologies Inc., Universal Display Corp., Video Display Corp., Wave Systems Corp. Cl. A, and Zebra Technologies Corporation 0$25$50$75$100$125$150NASDAQHemscottZebra12/31/200812/31/200712/31/200612/31/200512/31/200412/31/2003Zebra Technologies CorporationHemscott Industry Group IndexNASDAQ Composite Market Index Zebra Technologies Corporation 2008 Annual Report UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 000-19406 Zebra Technologies Corporation (Exact name of registrant as specified in its charter) delaware (State or other jurisdiction of incorporation or organization) 36-2675536 (I.R.S. Employer Identification No.) 333 Corporate Woods Parkway, Vernon Hills, IL 60061 (Address of principal (Zip Code) executive offices) Registrant’s telephone number, including area code: (847) 634-6700 Securities registered pursuant to Section 12(b) of the Act: Name of Exchange Title of Each Class on which Registered Class A Common Stock, The NASdAq Stock par value $.01 per share Market, LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well- known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes __X No __ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes __ No __X Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes __X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer ” and “smaller reporting company” in Rule 12b-2 of the Securities Act (Check one): Large accelerated filer __X Accelerated filer __ Non-accelerated filer __ Smaller reporting company __ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act). Yes __ No __X As of June 28, 2008, the aggregate market value of each of the registrant’s Class A Common held by non-affiliates was approximately $2,157,955,000. The closing price of the Class A Common Stock on June 27, 2008, as reported on the NASdAq Stock Market, was $33.17 per share. As of February 20, 2009, 60,570,526 shares of Class A Common Stock, par value $.01 per share, were outstanding. Documents Incorporated by Reference Certain sections of the registrant’s Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on May 21, 2009, are incorporated by reference into Part III of this report.  ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES PART I INDEX PAGE References in this document to “Zebra,” “we,” “us,” or “our” refer to Zebra Technologies Corporation and its subsidiaries, unless the context specifically states otherwise. PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 11 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 6. Selected Financial data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 7. Management’s discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 7A. quantitative and qualitative disclosures About Market Risk . . . . . . . . . . . . . . . 24 Item 8. Financial Statements and Supplementary data . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Item 9. Changes in and disagreements with Accountants on Accounting and Financial disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 PART III Item 10. directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . 27 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 13. Certain Relationships and Related Transactions, and director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 14. Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 PART IV Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SIGNATURES Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Index to Consolidated Financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-1 1 Safe Harbor Forward-looking statements contained in this filing are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon a variety of important factors which could cause actual results to differ materially from those reflected in such forward looking statements. These factors include: • Market acceptance of Zebra’s printer and software products and competitors’ product offerings and the potential effects of technological changes, • The effect of market conditions in North America and other geographic regions, • Our ability to control manufacturing and operating costs, including the success of migrating final printer product assembly offshore to a third-party manufacturer, • Success of integrating acquisitions, • Interest rate and financial market conditions because of our large investment portfolio, • Foreign exchange rates due to the large percentage of our international sales and operations, and • The outcome of litigation in which Zebra is involved, particularly litigation or claims related to infringement of third-party intellectual property rights. When used in this document and documents referenced, the words “anticipate,” “believe,” “estimate,” “will” and “expect” and similar expressions as they relate to Zebra or its management are intended to identify such forward-looking statements. We encourage readers of this report to review Item 1A, “Risk Factors,” in this report for further discussion of issues that could affect Zebra’s future results. Zebra undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this annual report. Item 1. Business Zebra Technologies Corporation was incorporated as an Illinois Corporation in 1969. We became a delaware corporation in 1991 in connection with our initial public offering, which we completed in August 1991. We remain organized under the laws of the State of delaware, and our principal offices are located at 333 Corporate Woods Parkway, Vernon Hills, Illinois 60061. In March 2009, our principal offices will relocate to 475 Half day Road, Lincolnshire, Illinois 60069. Our main telephone number is (847) 634-6700 and our primary Internet Web site address is www.zebra.com. You can find all of Zebra’s filings with the SEC free of charge through the investor page on this Web site, immediately upon filing. The Company Zebra delivers products and solutions that improve our customers’ ability to help our customers put their critical assets to work smarter by identifying, tracking and managing assets, transactions and people. Through the Specialty Printing Group (SPG), we design, manufacture and sell specialty printing devices that print variable information on demand at the point of issuance. These devices are used worldwide by manufacturers, service organizations and governments for automatic identification, data collection and personal identification in applications that improve productivity, deliver better customer service and provide more effective security. Our product range consists of direct thermal and thermal transfer label and receipt printers, passive radio frequency identification (RFId) printer/encoders, dye sublimation card printers and digital photo printers. We also sell a comprehensive range of specialty supplies consisting of self-adhesive labels, thermal transfer ribbons, thermal printheads, batteries and other accessories, including software for label design and printer network management. In 2007 and 2008, we acquired WhereNet Corp., proveo AG, Navis Holdings, LLC and Multispectral Solutions, Inc. Together, these companies comprise our Zebra Enterprise Solutions Group (ESG). The acquisitions of these companies expanded the range of identification and tracking solutions we deliver to our customers. In addition, they provided us with new technologies to offer our customers including active RFId and global positioning systems (GPS). The products of these companies consist of battery- powered wireless tags, fixed-position antennae, transponder modules and various application software. These companies also provide consulting services, maintenance contracts and software licenses. Zebra Specialty Printer Group (SPG) We design our printer products to operate at the point of issuance to produce and dispense high-quality labels, tickets, receipts, and plastic cards on demand. The exceptional diversity of applications using our printer products for barcoding and personal identification is comprised of routing and tracking, transactions processing, and identification and authentication. These applications require high levels of data accuracy, where speed and reliability are critical. They also include specialty printing for receipts and tickets where improved customer service and productivity gains may be the primary reason for printing, rather than a barcoding application. Plastic cards are used for secure, reliable personal identification or access control. Applications for our printing technology span most industries and geographies. They include inventory control, small package delivery, baggage handling, automated warehousing, JIT (Just-In-Time) manufacturing, employee time and attendance records, file management systems, hospital information systems, medical specimen labeling, shop floor control, in-store product labeling, employee Id cards, driver’s licenses, and access control systems. As of december 31, 2008, management estimates that Zebra has sold more than 7,500,000 printers to customers around the world. We believe competitive forces on businesses worldwide to strengthen security, reduce costs, improve quality, deliver better customer service, and increase productivity, support the adoption of the printing and automatic identification applications Zebra provides, because these solutions deliver significant and predictable economic benefits. Industry- mandated compliance requirements for bar code labeling and RFId tagging are also important catalysts in the deployment of these systems. We also believe that companies are adopting automatic identification systems that incorporate barcoding and RFId for business improvement applications. Many of these applications make increasing use of enterprise-wide resource planning (ERP) and other process improvement systems in manufacturing and service organizations. Greater emphasis on supply chain management, the drive to reduce errors in healthcare, and heightened concern over safety and security will lead to increased use of automatic identification systems. Still other applications are taking advantage of recent advances in wireless and hand-held computing technologies. personal identification and access control, including secure Id systems for driver’s licenses, employee and visitor badges, national identification cards, event passes, club membership cards and keyless entry systems. Our printers are used to produce bar code labels, passive RFId “smart” labels, receipts, plastic identification cards, wristbands and tags. We also sell related specialty labeling materials, thermal ink ribbons, and bar code label design and network management software. These products are used to provide bar code labeling, personal identification, and specialty printing solutions principally in the manufacturing supply chain, retail, healthcare and government sectors of the economy. We work closely with distributors, resellers, kiosk manufacturers and end users of our products to design and implement printing solutions that meet their technical demands. To achieve this flexibility, we provide our customers with a broad selection of printer models, each of which can be configured for a specific application. Additionally, we will select and, if necessary, create appropriate labeling stock, ink ribbons and adhesives to suit a particular application. In-house engineering personnel in software, mechanical, electronic and chemical engineering participate in the creation and development of printing solutions for particular applications. We produce the industry’s broadest range of rugged, on-demand thermal transfer and direct thermal printers. Our printing systems include hundreds of optional configurations that can be selected to meet particular customer needs. We believe this breadth of product is a unique and significant competitive strength, because it allows Zebra to satisfy the widest variety of thermal printing applications. Of the major printing technologies, which include ink jet, laser and impact dot matrix, we believe that direct thermal and thermal transfer technologies are best suited for most bar code labeling and other on-demand printing applications. Thermal transfer printing produces dark, solid blacks and sharply defined lines that are important for printing readily scannable bar codes. These images can be printed on a wide variety of labeling materials, which enable users to affix bar code labels to virtually any object. This capability is very important in the industrial and service sectors Zebra serves. direct thermal printing is best suited where ease of use, smaller size and cost are important factors in the application. Accordingly, this technology is found principally in Zebra’s mobile and desktop units. As of december 31, 2008, we offered 56 thermal printer models with numerous variations, in eight categories as follows: • Performance tabletop printers for applications requiring continuous operation in high output, mission-critical and industrial settings. • RFID printer/encoders for passive high frequency (HF) and ultra-high frequency (UHF) radio frequency identification (RFId) in the retail supply chain, for defense logistics, and other applications. These units are used to print and encode “smart labels” in a single pass. Smart labels are printable labels embedded with an ultra- thin radio frequency transponder. Information encoded in these transponders can then be read and modified by a radio frequency reader. • Mid-range tabletop printers, which are designed for demanding commercial applications. • Desktop printers to deliver value and performance in applications with lower volume Concern for safety and security and personal identification contribute to demand for our card printer products. This concern has heightened interest in systems that provide or space restrictions. • Mobile printers to meet the printing needs of workers in the field. 2 • Print engines, which are sold to manufacturers and integrators of high-speed automatic label applicator systems and are available with or without RFId smart label capabilities. • Kiosk and ticket printers for use in kiosks and other unattended printing applications. • Card printers, which print national identity cards, driver’s licenses, employee identification badges, gift cards and personalized cards. In addition to their use in on-demand automatic identification applications, our thermal printers can also be used for on-site batch production of custom bar code labels and other graphics. This capability results in shorter lead times, reduced inventory, and more flexibility than can be provided with traditional off-site printing. Printer Supplies Supplies products consist of stock and customized thermal labels, wristbands, smart labels and tags, plastic cards, card laminates and thermal transfer ribbons. Zebra promotes the use of genuine Zebra brand supplies with its equipment. Zebra fully supports its printers, resellers and end users with an extensive line of superior quality, high-performance supplies optimized to a particular user’s needs. Supplies are chosen in consultation with the reseller and end user based on the specific application, printer and environment in which the labeling system must perform. These printing solutions frequently include proprietary ribbon and label formulations that are designed to optimize image resolution and printer performance while meeting the most demanding end user application performance criteria. Factors such as adhesion, resistance to scratches, smudges and abrasion, and chemical and environmental exposures are all taken into account when selecting the type of ribbon and labeling materials. The use of supplies that are not carefully matched to specific printers can degrade image quality, and decrease the part life of key printer components such as printheads. Printer Related Software Zebra has specialized printer management, label design and driver solutions to help unlock the full potential of Zebra printers. The ZebraLink Solutions suite of networking, software, firmware offerings, combined with the enhanced printer management capabilities of ZebraNet™ Bridge, makes Zebra’s printers easy to use and integrate into small, medium and enterprise-wide environments. Our goal is to provide software that enables high levels of functionality to all major computer network and software systems. Network systems include Ethernet, 802.11b/g and Bluetooth®. In 2008, a Mobile printer-based Software development Kit was introduced to aid with integration into Windows Mobile® applications. Zebra also introduced ZBI 2.0, an optional printer programming language, which allows customers to create and run customized applications on Zebra printers. Zebra offers label design and integration software specifically designed to optimize the performance of Zebra bar code label printers. Zebra’s suite of label design and printer configuration tools includes Zebradesigner™, Zebradesigner™ Pro, Zebradesigner™ for XML, and Zebradesigner™ Label design Software for use with mySAP™ Business Suite. In 2008, Zebra added the Enterprise Connector Solution for Oracle® Business Intelligence Publisher™, which delivers seamless integration between Oracle and Zebra printers, creating a versatile, easily managed, cost-effective printing platform. Printer Maintenance and Services Zebra provides depot maintenance and repair services at repair centers in Vernon Hills, Illinois; Camarillo, California; Canada; Preston, U.K.; Singapore; China; and the 3 Netherlands. Zebra Authorized Service Providers (ZASP) also provide repair services for most Zebra products at their locations. In addition, Zebra offers on-site repair services for tabletop printers in the United States. Outside of the United States, Zebra’s resellers may provide maintenance service, either directly as ZASPs or through independent service agents. Zebra also provides technical support from in-house support personnel located in the United States, the United Kingdom and Singapore. For most Zebra products, Zebra provides interactive technical support via the Internet at www.zebra.com, 24 hours per day, seven days per week. Printer Warranties In general, Zebra provides warranty coverage of one year on printers against defects in material and workmanship. Printheads are warranted for nine months, and batteries are warranted for three months. Zebra supplies are warranted against defects in material and workmanship for their stated shelf life or twelve months, whichever ends first. defective equipment and supplies may be returned for repair or replacement during the applicable warranty periods. Zebra’s Printer Technology Our customers rely on Zebra to provide products and systems to identify, authenticate, track or route both items and people, and then process the related transactions. These products and systems use technologies that provide specific benefits in each application. All Zebra printers and print engines use thermal printing, either direct thermal printing, thermal transfer printing or dye-sublimation printing. This technology creates an image by heating certain pixels of an electrical printhead to selectively image a ribbon or heat- sensitive substrate. direct thermal printers apply the heat directly to a thermally-sensitive label, wristband, or receipt to create an image. This benefits applications needing simple, reliable operation such as shelf labeling, patient identification, and kiosk receipts. Some desktop label printers, mobile printers and kiosk printers support only direct thermal printing. Thermal transfer printers apply heat to a ribbon to release ink onto labels or tags. This allows a wider range of specialty label materials and associated inks to be used for applications like circuit board labels, chemical identification and product labels requiring resistance to chemicals, temperature extremes, abrasion, or long life. Performance, mid- range, print-engines and some desktop printers use thermal transfer printing but can also support direct thermal printing. dye-sublimation printers apply heat to a ribbon to release a dye into a plastic card or treated paper. This creates full color, photographic quality images well-suited to driver licenses, access and identification cards, transaction cards, and on-demand photographs. Our card printers use dye-sublimation printing. direct thermal and thermal transfer printers create crisp images at high speed, making them ideal for printing easily readable text and machine readable bar codes. dye sublimation thermal printers quickly create full-color images with visual characteristics more similar to halide-based film than to pixel-based ink jet or laser printers, making them ideal for high quality photographs and personalized plastic cards. Some printers also include HF (13.56 MHz) or UHF (860-960 MHz) RFId technology that can encode data into passive RFId transponders embedded in a label, card, or wristband. Zebra’s printers integrate company-designed mechanisms, electrical systems, and firmware. Enclosures of metal or high-impact plastic ensure durability. Special mechanisms optimize handling of labels, ribbons, and plastic cards. Fast, high-current electrical systems provide consistent image quality. Mobile printers use NiMH or LiIon batteries to optimize print quality over an extended operating shift. Firmware supports serial, parallel, Ethernet, USB, infrared, Bluetooth, or 802.11b/g wireless communications with appropriate security protocols. Printing instructions can be received as a proprietary language such as Zebra Programming Language II (ZPL II®), as a print driver-provided image, or as user-defined XML. This makes the printers easy to integrate into virtually all common computer systems including those operating on UNIX, Linux, MS/dOS®, or Microsoft® Windows® operating systems. Some independent software vendors, including Adobe, Oracle and SAP, have included Zebra printing support in applications for healthcare, warehouse management, manufacturing, passenger transportation, and retailing. Printer Sales and Marketing Sales. We sell our printer products primarily through distributors, value-added resellers (VARs), and original equipment manufacturers (OEMs). We also sell our printer products directly to a select number of named customer accounts. For media and consumables, we also sell directly to end users through the Internet and telesales operations. distributors and VARs purchase, stock and sell a variety of automatic identification components from different manufacturers and customize systems for end-user applications using their systems and application integration expertise. Because these sales channels provide specific software, configuration, installation, integration and support services required by end users within various market segments, these relationships allow Zebra to reach end users throughout the world in a wide variety of industries. Zebra experiences a minor amount of seasonality in sales, depending on the geographic region and/or vertical market. We functionally classify our direct VARs as Premier Partners, Advanced Partners, or Associate Partners, depending on their business competencies, depth and breadth of their sales teams, customer support capabilities, contributions to Zebra’s strategic goals and sales commitment to Zebra. In addition, we offer VARs the opportunity to earn certifications for mobile/wireless printers, supplies, services and RFId products in vertical markets. We also sell through distributors, which in turn sell to an extended VAR community. All VARs, as well as OEMs and systems integrators, provide customers with a variety of automatic identification components including scanners, accessories, applications software and systems integration expertise, and, in the case of some OEMs, resell the Zebra-manufactured products under their own brands as part of their own product offering. We believe that the breadth of this indirect channel network, both in terms of variety and geographic scope, enhances our ability to compete. In some instances, we have designated a customer as a strategic account when purchases of Zebra products reach specified levels and support requirements for the account become highly customized. Zebra sales personnel, either alone or together with our partners, manage these strategic accounts to ensure their needs, including consistent support for projects and applications, are being met. The sales function also encompasses a group that manages a small number of Global Alliances. They direct the business development strategies for a limited number of third- party relationships that are strategic to new demand creation for specific vertical markets and/or specific applications. Marketing. Marketing operations encompass corporate marketing, marketing communications, product marketing, vertical marketing, solutions marketing, market research and channel marketing functions. Corporate marketing conducts activities to enhance the Zebra corporate brand, corporate public relations, internal corporate communications and our Web site. The product marketing group identifies, evaluates and recommends new product opportunities and manages product introductions, positioning and demand creation. Product marketing also focuses on strategic planning and market definition and analyzes Zebra’s competitive strengths and weaknesses. Printer Production and Manufacturing We design our products to optimize product performance, quality, reliability, durability and versatility. These designs combine cost-efficient materials, sourcing and assembly methods with high standards of workmanship. In February 2008, we announced that final printer assembly will be transferred to a third-party manufacturer, Jabil Circuit, Inc., by the end of 2009. This action is intended to optimize our global printer product supply chain by improving responsiveness to customer needs and increasing Zebra’s flexibility to meet emerging business opportunities. See Note 22 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion of the transfer and transition process. during the transition, we will continue to manufacture some printers at our domestic factories while increasing production by Jabil to ensure consistent flow of product to our customers. In our factories we assemble our products largely on a configure-to-order basis using components that are sourced from around the world. We have the in-house capability to produce mechanical assemblies and design many of our own tools, fixtures and test equipment. We currently buy prefabricated component parts and subassemblies for use in the manufacture of our products. Critical subassemblies include printheads, printed circuit board assemblies, power supplies, integrated circuits, and stepper motors, which are obtained from domestic and foreign suppliers. Purchase contracts provide for price variation in the event of commodity price changes in the cost of raw materials. Zebra typically experiences significant variance in demand and, thus, carries inventory and partners with key suppliers to deal with the variation. Purchases of these components by Zebra will decline as printer assembly directly by Zebra declines and assembly by Jabil increases. Over the remainder of 2009, we will continue to transfer the assembly of printer product lines to Jabil. during the transition, our goal is to decrease in-house printer production by printer line as the assembly of those printer lines by Jabil increases. We will maintain assembly of those printers in-house until Jabil’s quality and production yields reach acceptable levels to ensure product availability to meet customer demands. For this reason, we expect inventories could temporarily rise until all printer manufacturing is transferred, in-house assembly lines are shut down and excess inventories are sold down. Jabil will produce our printers to our design specifications in the quantities we order. Zebra will maintain control of the supply chain including supplier selection and price negotiations of component parts. Jabil is responsible for the procurement of the component parts and subassemblies used in the Zebra printers it produces. Zebra has subsidiary located in Guangzhou, China, and has an office within 10 minutes of the Jabil facility in China where the Zebra products are assembled. This office is staffed with Zebra sourcing, engineering and quality personnel to help ensure that we receive optimal pricing on raw materials and the final printers meet our quality standards. Zebra printers manufactured by Jabil 4 are shipped to Zebra’s regional distribution centers. The majority of the product will pass directly through to Zebra’s customers but a small percentage will be reconfigured through firmware downloads, packaging and some other customization before they are shipped to customers. Some assembly will be conducted in the U.S. to satisfy customer needs. and high speeds compared with alternative printing technologies. We view passive RFId smart label encoding and active RFId location systems as complementary technologies to bar coded printing, offering significant growth opportunities to Zebra as the technologies become more widely adopted. Printer Competition Many companies are engaged in the design, manufacture and marketing of bar code label printers, RFId printer-encoders and card personalization solutions. We consider our direct competition in bar code label and receipt printing to be producers of on-demand thermal transfer and direct thermal label printing systems, printer-encoders, mobile printers and supplies. We also compete, however, with companies engaged in the design, manufacture and marketing of printing systems that use alternative technologies, such as ink-jet and laser printing. Many of these companies are substantially larger than Zebra. dye sublimation, the technology used in our card printers, is only one of several commercially available types of equipment used to personalize cards. We also compete with companies that produce identification cards using alternative technologies, which include ink-jet, thermal transfer, embossing, film-based systems, encoders, laser engraving and large-scale dye sublimation printers. These card personalization technologies offer viable alternatives to Zebra’s card printers and provide effective competition from a variety of companies, many of which are substantially larger than Zebra. In addition, service bureaus compete for end user business and provide an alternative to the purchase of our card printing equipment and supplies. Our ability to compete effectively depends on a number of factors. These factors include the reliability, quality and reputation of the manufacturer and its products; hardware and software innovations and specifications; breadth of product offerings; information systems connectivity; price; level of technical support; supplies and applications support offered by the manufacturer; available distribution channels; and financial resources to support new product design and innovation. We believe that Zebra presently competes favorably with respect to these factors. We face competition from many competitors, including the following (listed in alphabetical order): Altech; Argox; Avery dennison; Boca Systems; Brother International; Canon; CIM; Citizen; CognitiveTPG; ColorX; Copal; Custom; danaher; datacard; datamax-O’Neil, a unit of dover Corporation; dymo, a Newell Rubbermaid Company; Epson; Evolis; Extech; Fargo Electronics; Fuji; Godex; Hewlett-Packard; Hitachi; Intermec Technologies; Lexmark International; LogickaComp; MagiCard; Matica; Microcom; Mitsubishi; NBS; Nisca; Oki data; Olmec; Olympus; Practical Automation; Printronix; Sato; Seiko Instruments; Shinko; Song Woo Electronics; Sony; Star Micronics; Taiwan Semiconductor; ToshibaTEC; Victor data Systems; Woosim; and Xerox. The supplies business is highly fragmented and competition is comprised of numerous competitors of various sizes depending on the geographic area. Alternative Printer Technologies We believe thermal printing will be the label, card and receipt printer technology of choice in Zebra’s target applications for the foreseeable future. Among the many advantages of direct thermal and thermal transfer printing is the ability to print high- resolution, durable images on a wide variety of label materials at relatively low costs 5 If other technologies were to evolve or become available to Zebra, it is possible that those technologies would be incorporated into our products. Alternatively, if such technologies were to evolve or become available to our competitors, Zebra’s products may become obsolete. This obsolescence would have a significant negative effect on Zebra’s business, financial position, results of operations and cash flows. Therefore, we continually assess competitive and complementary methods of bar code printing and other means of automatic identification. Alternative print technologies assessed include ink jet, laser and direct marking. While we cannot be sure that new technology will not supplant thermal printing for labels, cards and receipts, we are not aware of any developing technology that offers the advantages of thermal printing for our targeted applications. We continually monitor and evaluate new RFId technologies, support their standards development, and rapidly adopt RFId into new Zebra products and systems as new markets and applications emerge. Zebra Enterprise Solutions Group (ESG) Formed in 2008 based upon the acquired businesses of Navis Holdings, LLC, WhereNet Corp., proveo AG, and Multispectral Solutions Inc., Zebra Enterprise Solutions Group offers asset tracking and management solutions to optimize the flow of goods in complex logistical operations. Whether tracking containers and cargo through a major port, managing parts for lean manufacturing or managing ground support equipment at a major airport, the automated asset tracking and management solutions from ESG improve business processes. Utilizing the combined products offered by these businesses, ESG provides greater asset visibility and business efficiency for the aerospace and defense, aviation, automotive, industrial manufacturing, maritime, and transportation and logistics industries. Customers within these industries benefit by increasing productivity, lowering operational costs, and improving safety and security throughout their logistics operations. A substantial majority of ESG’s business consists of perpetual software licenses and related services including maintenance, support and consulting services. In addition, ESG sells hardware including our proprietary real time asset management hardware. These products and services may be bundled and sold together to customers or sold separately. • Software Licenses. We sell perpetual software licenses on a fixed fee basis. The amounts of the license fees are based primarily on the scope and functionality of the licenses purchased by the customer. The solutions we provide may also include third-party software. • Hardware. We sell both proprietary and third-party real time asset management hardware. Most of our hardware products provide electronic tagging of assets and real time information regarding the assets’ locations and telematics. We sell the hardware as part of integrated solutions and as replacement for other parts. • Consulting Services. We provide consulting services for the planning and implementation of our solutions including initial installation and training. Zebra’s professional services team works with customers who are implementing our applications for the first time, evaluating new technology automation solutions, integrating with third-party systems or upgrading to new platforms. Services are typically charged on a time and materials basis, although from time-to-time we may enter into fixed fee contracts. • Maintenance and Support. We offer support to our customers 24 hours a day, 7 days a week, 365 days a year, usually for an annual fee, which entitles them to software upgrades and technical support. We believe ESG is uniquely positioned with a broad range of asset tracking and optimization solutions to offer our customers. However, several competitors exist for each solution ESG provides. They include Aeroscout Inc., Trimble Technologies, Ekahau Inc., I.d. Systems Inc., Identec Solutions, Intermec Inc., and RF Code Inc., Cisco Systems Inc., Lockheed Martin Corp., Roper Industries, Inc., Siemens AG, Motorola, Inc., Amicus, Pinnacle VTIS, IBM, Cosmos, and Tideworks Technology. The ESG products extend Zebra’s reach beyond passive RFId by employing technologically advanced hardware and software solutions to locate, track, manage and optimize high-value assets, equipment and people. We offer a wide range of scalable real time locating systems (RTLS) technologies used to generate accurate, on-demand information about the physical location and status of high-valued assets. Customers benefit by utilizing the choice or combination of asset tracking products that can be “application matched” based on ISO/IEC 24730-2, Cisco CCX Wi-Fi, precision global positioning systems (GPS), and ultra wideband (UWB) technologies. Our selection of RTLS asset tracking product offerings includes battery-powered active RFId WhereTag™ tags, WhereCall™ button tags, and precision WhereTrack™ products. These asset tags enable organizations to access accurate, real-time information on the location and status of their assets both indoors and outdoors. In addition, we offer a selection of RTLS infrastructure products. These products receive tag transmissions and forward the information to the Visibility Server Software™ (a middleware application) which provides location calculations, database and system management functions and asset visibility. The flexible infrastructure supports large tag populations and coverage areas that can range from small to large. We offer a broad set of software development tools for integrating ESG hardware, middleware applications and software applications, with customer and third-party applications. Our middleware application, Visibility Server Software, provides software tools to design, configure, operate and troubleshoot our RTLS products. Visibility Server Software serves as the central repository for all of the real-time location and communication data captured by the ESG RTLS infrastructure. ESG sells its products and services into the following major vertical markets: • Airport Operations. Our Airport Visualizer™ provides integrated aviation solutions and helps to optimize motorized ground support equipment and other mobile assets/ equipments on the pavement immediately adjacent to an airport terminal area or hangers (commonly referred to as the “apron”). This solution helps improve the operational efficiencies of mobile assets for the global aviation industry which is faced with high costs in maintaining ample amounts of equipment, high fuel consumption, equipment misuse, rising gas emission and high levels of equipment congestion. As of december 31, 2008, our Airport Visualizer solution helps to optimize the processes of approximately 1,200 airport ground service vehicles. • Marine and Rail Terminal Operations. Installed and used at approximately 200 marine terminals around the world, our SPARCS™ (synchronous planning and real time control system) terminal operating system (TOS) helps terminal operators optimize the flow of containers through the facility by managing the processes of a terminal operation. Zebra’s TOS provides users real-time visibility of containers for better scheduling and routing, among other benefits, to lower costs, manage growth and minimize capital investments in land and berth space. Customers operating rail and truck terminals have begun to use our terminal operating system to improve their logistics operations as well. Our Powerstow® solution helps terminal operators optimize ship stowage to minimize total voyage cost and maximize efficiency. Powerstow® offers easy-to-use planning tools that provide real-time visibility of stowage operations. It uses graphic tools along with proprietary software to help operators configure the placement of cargo on a ship, taking into account several parameters such as weight and destination to improve safety and vessel utilization. • distribution Operations. Our Yard Management Solution Suite™ provides effective management over gate schedules and dock assignments by providing the ability to track, in real-time, the location and status of all vehicles and their associated inventory throughout the shipping yard or dock. Our Yard Management Suite includes modules for dock and yard management, gate automation and scheduling for enhanced security, enterprise asset visibility, and container tracking. These optimize dock and yard management solutions, improve customer support, lower operating costs and increase yard and dock capacity. • Manufacturing Operations. We provide an integrated wireless infrastructure for real- time location, digital messaging, telemetry, and wireless networking applications to give manufacturers the ability to continuously manage the physical location and status of their critical assets for improving lean processes within the core manufacturing functions. ESG products and services are primarily sold through ESG’s global direct sales force which is organized around geographic and vertical markets. We complement our direct sales through the use of other channels including systems integrators with particular vertical market expertise. ESG’s proprietary software and hardware are developed primarily by its internal team of engineers. Generally, our software is warranted for 90 days after going live to function consistently with its specifications, and our hardware is warranted to be free from material defects in materials and workmanship for up to one year after purchase. Customers Zebra has sold over 7,500,000 thermal printers to customers as of december 31, 2008. ScanSource, Inc., is our most significant customer. Our net sales to ScanSource, an international distributor of Zebra SPG products, as a percent of our total net sales, were as follows: Percent of sales Year Ended December 31, 2008 15.4 2007 16.5 2006 17.1 No other customer accounted for 10% or more of total net sales during these years. 6 Sales Net sales by product category for the last three years were (in thousands): Product Category Hardware Supplies Service and software Shipping and handling Cash flow hedging activities Year Ended December 31, 2008 2007 2006 $704,992 172,106 105,113 6,843 (12,354) $660,034 161,678 42,801 6,826 (3,060) $578,002 150,709 25,664 6,022 (873) $759,524 Total net sales $976,700 $868,279 The increase in service and software net sales in 2008 is due to our ESG acquisitions. Net sales to international customers, as a percent of total net sales, were as follows: Percent of net sales Year Ended December 31, 2008 54.5 2007 52.1 2006 50.0 We believe that international sales have the long-term potential to grow faster than domestic sales because of the lower penetration of automatic identification applications outside North America. As a result, Zebra has invested resources to support our international growth and currently operates facilities and sales offices, or has representation, in 26 different countries. Research and Development Zebra’s research and development expenditures for the last three years were as follows (in thousands, except percentages): Year Ended December 31, 2008 2007 2006 Research and development expenses – SPG (excluding acquired in process technology) Percent of SPG net sales Research and development expenses – ESG (excluding acquired in process technology) Percent of ESG net sales $55,735 6.3 $29,385 31.2 $50,213 6.0 $ 7,387 21.0 $48,959 6.4 — — We devote significant resources to developing new printing solutions for our target markets and ensuring that our efficiently manufactured products maintain high levels of reliability. Research and development resources are also directed toward enhancing our enterprise solutions systems. The increase in research and development expenditures for ESG in 2008 is mainly attributed to the acquisition of Navis Holdings, LLC late in 2007. Intellectual Property Rights Zebra relies on a combination of trade secrets, patents, employee and third party nondisclosure agreements, copyright laws and contractual rights to establish and protect its proprietary rights in its products. We have and actively protect many domestic and international trademarks. We hold 320 United States and foreign patents and have 171 7 United States and foreign patent applications pending pertaining to products. The duration of these patents ranges from 2 to 23 years. The expiration of any individual patent would not have a significant negative impact on our business. despite our efforts to protect our intellectual property rights, it may be possible for unauthorized third parties to copy portions of our products or to reverse engineer or otherwise obtain and use some technology and information that we regard as proprietary. Moreover, the laws of some countries do not afford Zebra the same protection to proprietary rights, as do United States laws. There can be no assurance that legal protections relied upon by Zebra to protect its proprietary position will be adequate. While Zebra’s intellectual property is valuable and provides certain competitive advantages, we do not believe that the legal protections afforded to our intellectual property are fundamental to our success. Patents have become increasingly used by businesses generally as a strategic business tool and in recent years the number of patent applications and grants has risen dramatically. As a result, it is increasingly important that Zebra takes appropriate steps to maintain and develop its own patent portfolio and reduce the risk of disputes involving third party intellectual property rights. Other trademarks mentioned in this report are the property of their respective holders and include IBM, a registered trademark of International Business Machines; Kodak, a registered trademark of Eastman Kodak; UNIX, a registered trademark of UNIX Systems Laboratories; MS/dOS and Windows, registered trademarks of Microsoft; SAP, a registered trademark of SAP AG; Linux, a registered trademark of Linus Torvalds; and Accelio Present Central, a registered trademark of Accelio. Bluetooth is a trademark owned by Bluetooth SIG and used by Zebra under license. Employees As of January 30, 2009, Zebra employed approximately 3,200 persons, of which 2,459 are a part of SPG, 545 are a part of ESG and the remaining are corporate employees. None of these employees is a member of a union. We consider our employee relations to be very good. Additional Information For financial information regarding Zebra, see Zebra’s Consolidated Financial Statements and the related Notes, which are included in this Annual Report on Form 10-K. Zebra has two reportable segments for our operations and products. Financial information about segments and geographic areas is found in Note 18 to the Consolidated Financial Statements. Item 1A. Risk Factors Investors should carefully consider the risks, uncertainties and other factors described below, as well as other disclosures in Management’s discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on Zebra’s business, financial condition, operating results, and growth prospects. Current economic conditions and market disruptions may adversely affect Zebra’s business and results of operations. Adverse economic conditions, in the United States or internationally, or reduced information technology spending may adversely impact our business. A substantial portion of our business depends on our customers’ demand for our products and services, the overall economic health of our current and prospective customers and general economic conditions. As widely reported, financial markets throughout the world have been experiencing extreme disruption in recent months, including extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others, failure and potential failures of major financial institutions and unprecedented government support of financial institutions. These developments and the related general economic downturn will adversely impact Zebra’s business and financial condition in a number of ways, including impacts beyond those typically associated with other recent downturns in the U.S. and foreign economies. The slowdown will likely lead to reduced information technology spending by end users, which has already adversely affected and may continue to adversely affect Zebra’s product sales. If the slowdown is severe enough, it could necessitate further testing for impairment of goodwill, as well as the write-down of other intangible assets, beyond those already recognized. In addition, cost reduction actions may be necessary which would lead to additional restructuring charges. The current tightening of credit in financial markets and the general economic downturn will likely adversely affect the ability of Zebra’s customers, suppliers, outsource manufacturer and channel partners (e.g., distributors and resellers) to obtain financing for significant purchases. The tightening could result in a decrease in or cancellation of orders for Zebra’s products and services, could negatively impact Zebra’s ability to collect its accounts receivable on a timely basis, could result in additional reserves for uncollectible accounts receivable being required, and in the event of the contraction in Zebra’s sales, could lead to dated inventory and require additional reserves for obsolescence. Significant volatility and fluctuations in the rates of exchange for the U.S. dollar against currencies such as the euro, the British pound and the Brazilian real could negatively impact Zebra’s customer pricing and adversely affect Zebra’s results. Zebra is unable to predict the duration and severity of the current economic downturn and disruption in financial markets or their effects on Zebra’s business and results of operations, but the consequences may be materially adverse and more severe than other recent economic slowdowns. Zebra could encounter difficulties in any acquisition it undertakes, including unanticipated integration problems and business disruption. Acquisitions could also dilute stockholder value and adversely affect operating results. Zebra may acquire or make investments in other businesses, technologies, services or products. For example, in 2007 and 2008 Zebra acquired WhereNet Corp., proveo AG, Navis Holdings, LLC, and Multispectral Solutions, Inc., which together comprise what we refer to as the Zebra Enterprise Solutions Group. An acquisition may present business issues which are new to Zebra. The process of integrating any acquired business, technology, service or product into operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume considerable management time and attention, which could otherwise be available for ongoing operations and development of the business. The expected benefits of any acquisition may not be realized. Acquisitions also may involve a number of risks, including risks with respect to: • Difficulties and uncertainties in transitioning the customers or other business relationships from the acquired entities to Zebra, • The loss of key employees of acquired entities, • Ability of acquired entities to fulfill obligations to their customers, • The discovery of unanticipated issues or liabilities, • The failure of acquired entities to meet or exceed expected returns, and • The acquired entities’ ability to improve internal controls and accounting systems to be compliant with requirements applicable to public companies subject to SEC reporting. Moreover, Zebra may be unable to identify, negotiate or finance future acquisitions successfully. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses. Zebra Enterprise Solutions is a new business. Prior to the purchases in 2007, Zebra had no experience operating businesses which are in the business conducted by Zebra Enterprise Solutions Group. The Zebra Enterprise Solutions Group provides enterprise software solutions to customers which require implementation in complex environments over extended periods of time and use percentage-of-completion accounting, which has not been Zebra’s historic business. Zebra may be a party to fixed price contracts particularly for its ESG Unit that could become unfavorable contracts. From time to time ESG may enter into contracts to provide services to customers for fixed fees. Such a contract could result in material loss to Zebra if the cost to perform such contract ultimately exceeds the fees earned on such contract. Zebra is transferring final assembly of its thermal printers to Jabil Circuit and will be totally dependent on Jabil for the manufacturing of such printers. A failure by Jabil to provide manufacturing services to Zebra as Zebra requires, or any disruption in such manufacturing services, may adversely affect Zebra’s business results. Zebra expects this transfer to be complete by the end of 2009. In an effort to achieve additional cost savings and operational benefits, Zebra has expanded its outsourcing activities to include the transfer of the final assembly of its thermal printers to Jabil Circuit’s facility in HuangPu, China. However, to the extent Zebra relies on a third party service provider such as Jabil for manufacturing services, Zebra may incur increased business continuity risks. Zebra will no longer be able to exercise control over the assembly of its thermal printers or any related operations or processes, including the internal controls associated with operations and processes conducted by Jabil and the quality of Zebra’s products assembled by Jabil. If Zebra is unable to effectively develop and implement its outsourcing strategy, it may not realize cost structure efficiencies and its operating and its financial results could be materially adversely affected. during the transition period, Zebra’s printers will be manufactured both in the United States by Zebra and in China by Jabil. If Zebra is unable to effectively manage its inventory levels during the period of concurrent manufacturing, it may not have sufficient inventories to meet customer needs. At the same time, difficulty managing inventory during the transition could lead to excess and obsolete inventory and related resulting losses. In addition, if Jabil experiences business difficulties or fails to meet Zebra’s manufacturing needs, then Zebra may be unable to meet production requirements, may lose revenue and may not be able to maintain its relationships with its customers. Without Jabil’s continuing manufacture of Zebra’s products and the continuing operation 8 of Jabil’s facility, Zebra will have no other means of final assembly of its thermal printers until Zebra is able to secure the manufacturing capability at another facility or develop an alternative manufacturing facility, which could be costly and time consuming and have a material adverse effect on Zebra’s operating and financial results. The increased elements of risk that arise from conducting certain operating processes in foreign jurisdictions may lead to an increase in reputational risk. during periods of transition, greater operational risk and customer concern may exist regarding the continuity of a high level of service delivery. The extent and pace at which Zebra is able to move manufacturing functions to Jabil’s facility and the extent to which its customers are affected by the transfer may be impacted by regulatory and customer acceptance issues. Although Zebra carries business interruption insurance to cover lost revenue and profits in an amount it considers adequate, this insurance does not cover all possible situations. In addition, the business interruption insurance would not compensate Zebra for the loss of opportunity and potential adverse impact, both short-term and long-term, on relations with Zebra’s existing customers resulting from Zebra’s inability to produce products for them. Zebra has significant operations outside the United States and sells a significant portion of its products internationally and purchases important components from foreign suppliers. In addition, the transfer of final assembly of its thermal printers to a Chinese facility began in 2008 and is expected to conclude in 2009. These circumstances create a number of risks. Zebra has significant overseas operations including, in particular, an increasing presence in China, which presents added risks. In addition, Zebra sells a significant amount of its products to customers outside the United States. Shipments to international customers are expected to continue to account for a material portion of net sales. Risks associated with operations, sales and purchases outside the United States include: • Inadequately managing and overseeing operations that are distant and remote from corporate headquarters, • Fluctuating foreign currency rates could restrict sales, or increase costs of purchasing, in foreign countries, • Adverse changes in, or uncertainty of, local business laws or practices, including the following: • Foreign governments may impose burdensome tariffs, quotas, taxes, trade barriers or capital flow restrictions, • Restrictions on the export or import of technology may reduce or eliminate the ability to sell in or purchase from certain markets, • Political and economic instability may reduce demand for our products, or put our foreign assets at risk, • Potentially limited intellectual property protection in certain countries may limit recourse against infringing products or cause Zebra to refrain from selling in certain geographic territories, • Staffing and managing international operations may be unusually difficult, • A government controlled foreign exchange rate and limitations on the convertibility of the Chinese Renminbi Yuan, • The failure to implement and maintain adequate internal controls relating to these operations, • Transportation delays that may affect production and distribution of Zebra’s products, and • A limited telecommunications infrastructure. 9 Zebra may not be able to continue to develop products to address user needs effectively in an industry characterized by rapid technological change. To be successful, Zebra must adapt to rapidly changing technological and application needs by continually improving its products as well as introducing new products and services to address user demands. Zebra’s industry is characterized by: • Rapidly changing technology, • Evolving industry standards, • Frequent new product and service introductions, • Evolving distribution channels, and • Changing customer demands Future success will depend on Zebra’s ability to adapt in this rapidly evolving environment. Zebra could incur substantial costs if it has to modify its business to adapt to these changes, and may even be unable to adapt to these changes. Zebra competes in a highly competitive market, which is likely to become more competitive. Competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements. Zebra faces significant competition in developing and selling its systems. Principal competitors have substantial marketing, financial, development and personnel resources. To remain competitive, Zebra believes it must continue to provide: • Technologically advanced systems that satisfy the user demands, • Superior customer service, • High levels of quality and reliability, and • Dependable and efficient distribution networks. Zebra cannot assure it will be able to compete successfully against current or future competitors. Increased competition in printers or supplies may result in price reductions, lower gross profit margins and loss of market share, and could require increased spending on research and development, sales and marketing and customer support. Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products. Any of these factors could reduce Zebra’s earnings. Zebra is vulnerable to the potential difficulties associated with the rapid increase in the complexity of its business. Zebra has grown rapidly over the last several years through domestic and international growth and acquisitions. This growth has caused increased complexities in the business. We believe our future success depends in part on our ability to manage our rapid growth and increased complexities of our business and the demands from increased responsibility on our management personnel. The following factors could present difficulties to us: • Manufacturing an increased number of products, • Increased administrative and operational burden, • Maintaining and improving information technology infrastructure to support growth, • Increased logistical problems common to complex, expansive operations, and • Managing increasing international operations. If we do not manage these potential difficulties successfully, our operating results could be adversely affected. Zebra sources some of its component parts from sole source suppliers. A disruption in the supply of such component parts could have a material adverse effect on our operations and financial results. Infringement by Zebra or Zebra suppliers on the proprietary rights of others could put Zebra at a competitive disadvantage, and any related litigation could be time consuming and costly. Third parties may claim that Zebra or Zebra suppliers violated their intellectual property rights. To the extent of a violation of a third party’s patent or other intellectual property right, Zebra may be prevented from operating its business as planned, and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method, if possible, to accomplish its objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel. If such claims are successful, they could result in costly judgments or settlements. Also, as new technologies emerge, such as RFId, the intellectual property rights of parties in such technologies can be uncertain. As a result, products involving such technologies may have higher risk of claims of infringement of the intellectual proprietary rights of third parties. The inability to protect intellectual property could harm Zebra’s reputation, and its competitive position may be materially damaged. Zebra’s intellectual property is valuable and provides Zebra with certain competitive advantages. Copyrights, patents, trade secrets and contracts are used to protect these proprietary rights. despite these precautions, it may be possible for third parties to copy aspects of Zebra’s products or, without authorization, to obtain and use information which Zebra regards as trade secrets. Zebra may incur liabilities as a result of product failures due to actual or apparent design or manufacturing defects. Zebra may be subject to product liability claims, which could include claims for property or economic damage or personal injury, in the event our products present actual or apparent design or manufacturing defects. Such design or manufacturing defects may occur not only in Zebra’s own designed products but also in components provided by third party suppliers. A Zebra supplier has in the past provided us with defective lithium- ion battery packs which were subject to a product recall. Zebra generally has insurance protection against property damage and personal injury liabilities and also seeks to limit such risk through product design, manufacturing quality control processes, product testing and contractual indemnification from suppliers. However, due to the large and growing size of Zebra’s installed printer base, a design or manufacturing defect involving this large installed printer base could result in product recalls or customer service costs that could have material adverse effects on Zebra’s financial results. Larger orders may take longer to close and may not be completely fulfilled during a particular quarter. Zebra has been pursuing larger customer orders which typically involve a longer sales cycle. Such orders are more difficult to forecast, and whether a larger order is received by Zebra in a particular quarter or deferred to a later quarter could have a material effect on the financial results of Zebra from quarter to quarter. Zebra’s equipment is subject to U.S. and foreign regulations that pertain to electrical and electronic equipment, which may materially adversely affect Zebra’s business. These regulations influence the design, components or operation of such products. New regulations and changes to current regulations are always possible and, in some jurisdictions, regulations may be introduced with little or no time to bring related products into compliance with these regulations. Zebra’s failure to comply with these regulations may prevent Zebra from selling our products in a certain country. In addition, these regulations may increase our cost of supplying the products by forcing us to redesign existing products or to use more expensive designs or components. In these cases, Zebra may experience unexpected disruptions in our ability to supply customers with products, or we may incur unexpected costs or operational complexities to bring products into compliance. This could have an adverse effect on Zebra’s revenues, gross profit margins and results of operations and increase the volatility of our financial results. Zebra is implementing a new company-wide enterprise resource planning (ERP) system. The implementation process is complex and involves a number of risks that may adversely affect Zebra’s business and results of operations. Zebra is currently replacing its multiple legacy business systems at its different sites with a new company-wide, integrated enterprise resource planning (ERP) system to handle various business, operating and financial processes for Zebra and its subsidiaries. The new system will provide a variety of important functions, such as order entry, invoicing, accounts receivable, accounts payable, financial consolidation, logistics, and internal and external financial and management reporting matters. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system hardware and software and implementation activities that can continue for several years. Such an integrated, wide-scale implementation is extremely complex and requires transformation of business and financial processes in order to reap the benefits of the ERP system. Significant efforts are required for requirements identification, functional design, process documentation, data conversion, user training and post implementation support. Problems in any of these areas could result in operational issues including delayed shipments or production, missed sales, billing and accounting errors and other operational issues. System delays or malfunctioning could also disrupt Zebra’s ability to timely and accurately process and report key components of the results of its consolidated operations, its financial position and cash flows, which could impact Zebra’s ability to timely complete important business processes such as the evaluation of its internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. Until the new ERP system is fully implemented, Zebra expects to incur additional selling, general and administrative expenses to stabilize the system, and there can be no assurance that other issues relating to the ERP system will not occur or be identified. Zebra’s business and results of operations may be adversely affected if it experiences operating problems and/or cost overruns during the ERP implementation process or if the ERP system and the associated process changes, do not function as expected or give rise to the expected benefits. Economic factors that are outside Zebra’s control could lead to deterioration in the quality of Zebra’s accounts receivables. Zebra sells its products to customers in the United States and several other countries around the world. Sales are typically made on unsecured credit terms, which are generally consistent with the prevailing business practices in a given country. A deterioration of economic or political conditions in a country could impair Zebra’s ability to collect on receivables in the affected country. 10 Zebra depends on the ongoing service of its senior management and ability to attract and retain other key personnel. The future success of Zebra is substantially dependent on the continued service and continuing contributions of senior management and other key personnel. The loss of the service of any executive officer or other key employees could adversely affect business. The ability to attract, retain and motivate highly skilled employees is important to Zebra’s long-term success. Competition for personnel in Zebra’s industry is intense, and Zebra may be unable to retain key employees or attract, assimilate or retain other highly qualified employees in the future. Terrorist attacks or war could lead to further economic instability and adversely affect Zebra’s stock price, operations, and profitability. The terrorist attacks that occurred in the United States on September 11, 2001 caused major instability in the U.S. and other financial markets. Possible further acts of terrorism and current and future war risks could have a similar impact. Any such attacks could, among other things, cause further instability in financial markets and could directly, or indirectly through reduced demand, negatively affect Zebra’s facilities and operations or those of its customers or suppliers. Taxing authority challenges may lead to tax payments exceeding current reserves. Zebra is subject to ongoing tax examinations in various jurisdictions. As a result, we may record incremental tax expense based on expected outcomes of such matters. In addition, we may adjust previously reported tax reserves based on expected results of these examinations. Such adjustments could result in an increase or decrease to Zebra’s effective tax rate. Item 1B. Unresolved Staff Comments Not applicable. Item 2. Properties Zebra’s corporate headquarters are located in Vernon Hills, Illinois, a northern suburb of Chicago. Zebra conducts its operations from a custom-designed facility at this location, which provides approximately 225,000 square feet of space. Approximately 113,000 square feet have been allocated to office and laboratory functions and 112,000 square feet to manufacturing and warehousing. This facility was constructed in 1989 and expanded in 1993, 1995, 1996 and 1999. It is leased to Zebra under a lease terminating on June 30, 2014. 11 Zebra’s principal facilities as of december 31, 2008, are listed below: Location Square Footage Manufacturing, Administrative, Production & Warehousing Research & Sales Total Lease Expires Vernon Hills, Illinois, USA (S) 111,676 113,429 225,105 June 2014 Vernon Hills, Illinois, USA (S) Lincolnshire, Illinois, USA (C) — — 34,000 34,000 February 2009 44,395 44,395 June 2014 Camarillo, California, USA (S) 97,921 72,156 170,077 March 2011 Warwick, Rhode Island, USA (S) 24,516 75,324 99,840 April 2009 Santa Clara, California, USA (E) Oakland, California, USA (E) — — Greenville, Wisconsin, USA (S) 45,000 Otay Mesa, California, USA (S) 25,100 McAllen, Texas, USA (S) 15,500 Flowery Branch, Georgia, USA (S) 18,115 Heerenveen, The Netherlands (S) 48,427 — Bourne End, UK (S) Preston, UK (S) Total 20,757 20,757 december 2009 36,553 36,553 July 2013 5,000 4,900 2,500 2,145 46,145 24,700 50,000 March 2018 30,000 September 2011 18,000 September 2011 20,260 April 2012 94,572 January 2010 24,700 June 2014 30,450 8,600 39,050 Owned by Zebra 416,705 490,604 907,309 S – Specialty Printing Group; E – Enterprise Solution Group; C – Corporate In conjunction with our transition of printer manufacturing to a third-party manufacturer, we entered into a sale and leaseback transaction during 2008 for our manufacturing facility located in Camarillo, California. In addition, during March 2009, we will be moving our corporate headquarters to Lincolnshire, Illinois, from the Vernon Hills, Illinois, facility and have, therefore, entered into a lease at that location. Zebra leases various other facilities around the world, which are dedicated to administrative, research and sales functions. These other leases, solely or in aggregate, are not material to Zebra. Item 3. Legal Proceedings See Note 17 in the Notes to the Consolidated Financial Statements included in this Form 10-K. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 6. Selected Financial Data Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) DATA (In thousands, except per share amounts) Stock Information: Price Range and Common Stock Our Class A Common Stock is traded on the NASdAq Stock Market under the symbol ZBRA. The following table shows the high and low trade prices for each fiscal quarter in 2008 and 2007, as reported by the NASdAq Stock Market. 2008 High Low 2007 First quarter Second quarter Third quarter Fourth quarter $34.80 $27.50 32.66 28.25 16.18 38.47 34.13 28.99 Source: The NASDAQ Stock Market First quarter Second quarter Third quarter Fourth quarter High Low $42.38 $33.70 37.98 32.93 32.93 41.49 42.50 39.09 At February 20, 2009, the last reported price for the Class A Common Stock was $17.03 per share, and there were 352 registered stockholders of record for Zebra’s Class A Common Stock. In addition, we had approximately 28,000 stockholders who owned Zebra stock in street name. Dividend Policy Since our initial public offering in 1991, we have not declared any cash dividends or distributions on our capital stock. Zebra currently does not anticipate paying any cash dividends in the foreseeable future. Treasury Shares during the fourth quarter of 2008, Zebra purchased 2,627,532 shares of Zebra’s Class A common stock as follows: ISSUER PURCHASES OF EQUITY SECURITIES Period October 2008 (September 28 – October 25) November 2008 (October 26 – November 22) december 2008 (November 23 – december 31) Total Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced program Maximum number of shares that may yet be purchased under the program — $ — — 5,000,000 737,137 $19.10 737,137 4,262,863 1,890,395 $19.04 2,627,532 $19.06 1,890,395 2,627,532 2,372,468 2,372,468 (1) On October 27, 2008, Zebra announced that the Board authorized the purchase of up to 5,000,000 shares of Zebra common stock at prices to be determined at management’s discretion. There was no expiration on the authorization. All shares authorized for purchase and reflected in the above table were authorized under the Board’s 2008 authorization. On February 17, 2009, Zebra announced that the Board authorized the purchase of an additional 3,000,000 shares under the same terms. Net sales Cost of sales Gross profit Total operating expenses Operating income (loss) Income (loss) before income taxes and cumulative effect of accounting change Income (loss) before cumulative effect of accounting change Cumulative effect of accounting change Year Ended December 31, 2008 2007 2006 2005 2004 $ 976,700 $ 868,279 $ 759,524 $ 702,271 $ 663,054 497,395 479,305 494,651(1) (15,346) 451,161 417,118 273,933 143,185 401,104 358,420 277,991(2) 80,429 348,851 353,420 207,392 146,028 320,951 342,103 175,494 166,609 (11,913) 167,375 101,642 160,282 176,084 (38,421) 110,113 69,627 106,184 115,141 — — 1,319(3) — — Net income (loss) $ (38,421) $ 110,113 $ 70,946 $ 106,184 $ 115,141 Earnings (loss) per share before cumulative effect of accounting change Basic diluted Earnings (loss) per share Basic diluted Weighted average shares outstanding Basic diluted $ $ $ $ (0,60) (0.60) (0.60) (0.60) $ $ $ $ 1.61 1.60 1.61 1.60 $ $ $ $ 0.99 0.98 1.01 1.00 $ $ $ $ 1.49 1.47 1.49 1.47 $ $ $ $ 1.61 1.59 1.61 1.59 64,524 64,524 68,463 68,908 70,516 70,956 71,364 72,000 71,556 72,398 12 CONSOLIDATED BALANCE SHEET DATA (In thousands) Results of Operations: Fourth Quarter of 2008 versus Fourth Quarter of 2007, Year ended December 31, 2008 versus Year ended December 31, 2007 Cash and cash equivalents, restricted cash, investments and marketable securities (current and long-term)(4) $ 224,886 2008 2007 2006 2005 2004 December 31, Net sales Net sales by product category, percent change, and percent of total net sales for the three months and year ended december 31, 2008, and december 31, 2007, were (in thousands, except percentages): Three Months Ended December 31, Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 2008 $ 281,179 $ 559,189 $ 544,239 $ 557,993 Product Category Working capital Total assets Long-term obligations (5) Stockholders’ equity 271,831 298,660 850,878 1,034,278 8,452 10,250 710,738 404,836 963,142 9,969 680,554 918,415 7,709 665,062 868,044 4,011 902,693 877,681 857,972 803,893 Hardware Supplies Service and software Shipping and handling $163,510 $ 177,394 40,870 26,158 1,498 41,580 14,120 1,744 (1) Includes asset impairment charges of $157,600,000 and exit, restructuring and integration charges of $20,009,000. Cash flow hedging activities 532 (1,265) Total net sales $232,568 $233,573 (7.8) (1.7) 85.3 (14.1) NM (0.4) 70.3 17.6 11.2 0.7 0.2 100.0 75.9 17.8 6.0 0.88 (0.5) 100.0 (2) Includes litigation settlement of $53,392,000 and insurance receivable reserve of $12,543,000. (3) Relates to the estimation of forfeitures on prior year compensation expense outstanding at the adoption date of SFAS No. 123(R), Share Based Payment. See Note 4 in the Notes to the Consolidated Financial Statements included in this Form 10-K. (4) The decrease in cash and cash equivalents, restricted cash and investments and marketable securities in 2007 and 2008 was principally the result of (i) our acquisitions of WhereNet, proveo AG, and Navis during 2007 and our acquisition of Multispectral Solutions Inc., and (ii) purchase of our stock during 2008. See Note 5 in the Notes to the Consolidated Financial Statements included in this Form 10-K for further discussion of the acquisitions. (5) Long-term obligations include deferred compensation and unearned revenue. See Note 19 in the Notes to the Consolidated Financial Statements included in this Form 10-K for further discussion of the deferred Compensation Plan. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Net sales for the fourth quarter of 2008, compared with the fourth quarter of 2007, decreased 0.4%, compared to the fourth quarter of 2007. Sales weakness in our Europe, Middle East and Africa (EMEA) territory offset sales growth in Latin America, Asia Pacific and North America. In North America, strength in sales to large key accounts contrasted with declining sales to channel partners and distributors. Sales by the Enterprise Solutions Group (ESG) businesses we acquired in 2007 and 2008 also had a positive impact on our overall sales performance for the fourth quarter of 2008. Lower gross margin was affected by unfavorable changes in foreign exchange rates and product mix. Operating expenses increased as a result of ESG related acquisitions and higher costs for exit, restructuring and integration, offset by reductions in operating expenses to contain costs in the current difficult business environment. during the fourth quarter, we also took charges totaling $157,600,000 for the impairment of goodwill, intellectual property and other assets. Sales for all of 2008 increased by 12.5% compared to 2007. All geographic regions contributed to this growth, which was also aided by sales related to the acquisitions we made in 2007 to form our ESG business group. Gross profit margin also increased principally because of favorable foreign exchange rates and product mix due to higher margin ESG products. Increased operating expenses were due to our ESG acquisitions, increased amortization of intangibles and costs related to the integration and restructuring of our businesses. 13 Product Category 2008 Year Ended December 31, Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 Hardware Supplies $704,992 $660,034 172,106 161,678 6.8 6.4 Service and software 105,113 42,801 145.6 Shipping and handling 6,843 6,826 Cash flow hedging activities (12,354) (3,060) Total net sales $976,700 $868,279 0.2 NM 12.5 72.2 17.6 10.8 0.7 (1.3) 100.0 76.1 18.6 4.9 0.8 (0.4) 100.0 The increase in service and software revenue in 2008 is primarily due to the increased sales in ESG since that business’ sales have a high concentration of service and software, and the Navis business, which constitutes a significant part of ESG, was not acquired until late in the fourth quarter of 2007. Net sales to customers by geographic region, percent changes and percent of total net sales for the three months and year ended december 31, 2008, and december 31, 2007, were (in thousands, except percentages): Geographic Region 2008 Three Months Ended December 31, Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 Europe, Middle East and Africa Latin America Asia-Pacific $ 82,375 $ 93,895 (12.3) 17,871 20,338 15,452 16,100 Total International 120,584 125,447 North America Total net sales 111,984 108,126 $232,568 $233,573 15.7 26.3 (3.9) 3.6 (0.4) 35.4 7.7 8.7 51.8 48.2 40.2 6.6 6.9 53.7 46.3 100.0 100.0 Geographic Region 2008 Year Ended December 31, Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 Selling and marketing expenses changes, compared to the same periods in 2007, are due to the following (in thousands): Three Months Ended December 31, 2008 Year Ended December 31, 2008 Europe, Middle East and Africa Latin America Asia-Pacific Total International North America Total net sales $358,913 $320,225 76,489 97,032 60,090 71,871 532,434 452,186 444,266 416,093 $976,700 $868,279 12.1 27.3 35.0 17.1 6.8 12.5 36.8 7.8 9.9 54.5 45.5 36.9 6.9 8.3 52.1 47.9 Payroll and benefit costs Advertising and market development fund costs Professional services expenses Travel and entertainment expenses Other changes 100.0 100.0 Total (decreases) increases $(1,926) (640) 344 — (1,028) $(3,250) $5,365 1,997 1,451 1,334 (1,379) $8,768 Notable weakness in sales in EMEA from the economic downturn began in the third quarter of 2008 and continued into the fourth quarter. This trend offset continued sales growth in our Latin America, Asia Pacific and North America regions. Service and software increased 85.3% for the fourth quarter of 2008 from the fourth quarter of 2007 principally due to the recent acquisitions in ESG. For the fourth quarter, unfavorable foreign exchange movements decreased consolidated sales growth by 2.8 percentage points and EMEA sales growth by 7.0 percentage points. For the full year, printer unit volume increased 5.7%, with particular strength in mobile printers. Average unit prices declined principally because of a shift in product mix, with a decline in tabletop printers and relative strength of mobile and desktop printers. We also had ongoing strength in supplies, aftermarket and service revenues. Service and software increased 145.6% principally due to the recent acquisitions in ESG. Favorable foreign exchange movements added 0.6 percentage points to consolidated growth for the full year and 1.7 percentage points to EMEA growth. Cash flow hedging activities decreased revenues by $12,354,000 for the full year as a result of foreign exchange rates of hedging contracts being in excess of the actual month end foreign exchange rates. Gross Profit Gross profit information is summarized below (in thousands, except percentages): December 31, 2008 2007 Percent Change Percent of Net Sales 2008 Percent of Net Sales 2007 Three months ended Year ended $110,889 479,305 $113,298 417,118 (2.1) 14.9 47.7 49.1 48.5 48.0 The decrease in gross profit margin for the fourth quarter was due to unfavorable movements in foreign exchange movements and less favorable product mix in SPG, offset by higher margin ESG products gross margins. Foreign currency movements, net of hedging activities, decreased fourth quarter gross profit by $4,352,000. Foreign currency movements, net of hedging activities, for the full year increased gross profit by $6,391,000. Selling and Marketing Expenses Selling and marketing expenses are summarized below (in thousands, except percentages): December 31, 2008 2007 Percent Change Percent of Net Sales 2008 Percent of Net Sales 2007 Three months ended Year ended $ 32,433 130,764 $ 35,683 121,996 (9.1) 7.2 13.9 13.4 15.3 14.1 Selling and marketing expenses decreased in the fourth quarter due to a cost reduction program consisting primarily of headcount reductions implemented during the second half of 2008 in response to the current difficult business environment. Offsetting that, in part, were changes related to the ESG acquisitions, which increased selling and marketing expenses by $2,436,000 during the fourth quarter and $12,528,000 for the full year of 2008. Research and Development Costs The development of new products and enhancement of existing products are important to Zebra’s business and growth prospects. To maintain and build our product pipeline, we made investments in research and development, summarized below (in thousands, except percentages): December 31, 2008 2007 Percent Change Percent of Net Sales 2008 Percent of Net Sales 2007 Three months ended Year ended $20,653 85,120 $15,642 57,600 32.0 47.8 8.9 8.7 6.7 6.6 quarterly product development expenses fluctuate widely depending on the status of ongoing projects. We are committed to a long-term strategy of significant investment in product development. Changes in research and development costs, compared to the same periods in 2007, are due to the following (in thousands): Payroll and benefit costs Professional services expenses Project expenses Office services costs Other changes Total increases Three Months Ended December 31, 2008 Year Ended December 31, 2008 $4,029 $17,867 748 (214) 428 20 2,732 2,120 2,121 2,680 $5,011 $27,520 The increases are primarily related to the ESG acquisitions, which increased research and development costs by $3,774,000 during the fourth quarter and $18,833,000 for the full year of 2008. 14 General and Administrative Expenses General and administrative expenses are summarized in the table below (in thousands, except percentages): integration costs were $3,359,000. See Note 22 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the exit, restructuring and integration charges. December 31, 2008 2007 Percent Change Percent of Net Sales 2008 Percent of Net Sales 2007 Three months ended Year ended $20,090 87,885 $21,855 81,356 (8.1) 8.0 8.6 9.0 9.4 9.4 Changes in general and administrative expenses, compared to the same periods in 2007, are due to the following (in thousands): Three Months Ended December 31, 2008 Year Ended December 31, 2008 Payroll and benefit costs Information systems and communications costs Sales meeting expenses depreciation expenses Other changes Total (decreases) increases $(2,186) 49 — 687 (315) $(1,765) $ (375) 1,065 2,228 2,343 1,268 $6,529 General and administrative expenses decreased in the fourth quarter due to a cost reduction program consisting primarily of headcount reductions implemented during the second half of 2008 in response to the current difficult business environment. Offsetting that, in part, were changes related to the ESG acquisitions, which increased general and administrative expenses by $1,134,000 during the fourth quarter and $6,640,000 for the full year of 2008. Amortization of Intangible Assets Amortization of intangible assets increased $7,447,000 during 2008 due to our acquisitions of Navis, LLC in december 2007 and Multispectral Solutions, Inc., in April 2008. See Note 5 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the recent acquisitions. Asset impairment charges during the fourth quarter, Zebra recorded asset impairment charges in the amount of $157,600,000. These charges related to the write-down of assets related to our recent ESG acquisitions and intellectual property because of changes in valuations as a result of the current economic conditions and the business outlook. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Exit, restructuring and integration charges For the fourth quarter of 2008, Zebra recorded exit costs in the amount of $3,514,000 related to the transfer of our printer manufacturing to a third-party manufacturer and the closure of our Warwick, Rhode Island supplies manufacturing facility. We also recorded restructuring charges in the amount of $2,653,000 related to various organization changes we made in december 2008 in order to reduce costs. Integration costs related to the combination of our most recent acquisitions to form the Enterprise Solutions Group and were $1,624,000 for the fourth quarter. For the year, exit costs were $13,997,000 and 15 Operating Income (Loss) Operating income (loss) is summarized in the following table (in thousands, except percentages): December 31, 2008 2007 Percent Change Percent of Net Sales 2008 Percent of Net Sales 2007 Three months ended Year ended $(132,349) (15,346) $ 36,862 143,185 NM NM (56.9) (1.6) 15.8 16.5 The operating loss for 2008 is the result of the impairment charges we recorded in the fourth quarter, which totaled $157,600,000. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Also significantly contributing to the operating loss in 2008 were exit, restructuring and integrations costs of $20,009,000, offset by the WhereNet litigation/claim settlement of $5,302,000. See Note 22 for further information related to the exit, restructuring and integration costs and Note 5 for further information related to the litigation/claim settlement. Non-operating Income and Expenses Zebra’s non-operating income and expense items are summarized in the following table (in thousands, except percentages): Investment income Foreign exchange gains Other, net Three Months Ended December 31, Year Ended December 31, 2008 $1,295 2,640 (277) 2007 $8,545 553 231 2008 $1,281 3,518 (1,366) 2007 $23,966 523 (299) Total other income $3,658 $9,329 $3,433 $24,190 Rate of Return Analysis: Average cash and marketable securities balances $235,871 $375,269 $253,033 $420,184 Annualized rate of return 2.2% 9.1% 0.5% 5.7% Cash and marketable securities balances and resulting investment income for 2008 have decreased substantially compared to 2007 as a result of payments for recent acquisitions and for the repurchase of Zebra Class A common stock. during the third quarter of 2008, Zebra recorded losses on an auction rate security in the amount of $4,374,000 and on a long-term equity investment which was included in other assets in the amount of $2,897,000. See Note 3 to the Consolidated Financial Statements for further discussion of the valuation of the auction rate securities. Excluding these write-downs, Zebra’s annualized rate of return would have been 3.4% for 2008. during 2007, we liquidated all of our interests in our partnership holdings. As a result of these liquidations, we recorded investment income of $9,246,000 related to gains on the liquidations of the partnerships during 2007, $4,369,000 of which was recognized in the fourth quarter. Excluding these gains, Zebra’s 2007 annualized rate of return would have been 4.5% for the fourth quarter and 3.5% for the year. Income Taxes The effective income tax rate for the fourth quarter was 8.8% compared with 33.3% for the same quarter last year. For the full year of 2008, the effective income tax rate was not meaningful because a substantial portion of the impairment charges were not deductible for income tax purposes. The fourth quarter effective income tax rate was also affected by the impairment charges. For 2007, the effective income tax rate was 34.2%. Net Income (Loss) Zebra’s net income (loss) is summarized below (in thousands, except per share amounts): Three Months Ended December 31, Year Ended December 31, 2008 2007 2008 2007 Net income (loss) $ (117,361) $ 30,803 $ (38,421) $ 110,113 diluted earnings (loss) per share $ (1.88) $ 0.45 $ (0.60) $ 1.60 The net loss for 2008 is the result of pre-tax impairment charges of $157,600,000 that we recorded in the fourth quarter. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Also significantly contributing to the net loss in 2008 were exit, restructuring and integration costs of $20,009,000, offset by the WhereNet litigation/ claim settlement of $5,302,000. See Note 22 for further information related to the exit, restructuring and integration costs and Note 5 for further information related to the litigation/claim settlement. Business Groups Specialty Printing Group (in thousands, except percentages) Three Months Ended December 31, Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 2008 Net sales Cost of sales Gross profit Operating expenses $210,494 $217,229 113,187 111,889 97,307 105,340 66,781 51,599 Operating income $ 30,526 $ 53,741 (3.1) 1.2 (7.6) 29.4 (43.2) 100.0 100.0 53.8 46.2 31.7 14.5 51.5 48.5 23.8 24.7 Year Ended December 31, 2008 Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 Net sales Cost of sales Gross profit $882,459 $833,034 454,337 430,782 428,122 402,252 Operating expenses 221,934 188,661 Operating income $206,188 $213,591 5.9 5.5 6.4 17.6 (3.5) 100.0 100.0 51.5 48.5 25.1 23.4 51.7 48.3 22.6 25.7 Net sales in our Specialty Printing Group (SPG) decreased 3.1% during the fourth quarter of 2008 compared with the fourth quarter of 2007. Year-over-year sales growth in our Latin America, Asia Pacific and North America regions offset sales weakness in EMEA related to more difficult general economic conditions in the territory. New printer products (defined as printers released within 18 months prior to the end of the applicable fiscal period) as a percent of total printer product sales were as follows: Three months ended Year ended December 31, 2008 18.6 19.1 2007 16.6 11.1 The diversity of our business across verticals and channels benefited us during the fourth quarter, compared to the fourth quarter of 2007. SPG had its strongest quarter of the year with key accounts, which offset lower demand in the channel. In addition to shipments to retailers and small package delivery, we also experienced strong sales into healthcare, government and mobile workforce. Our international sales are denominated in multiple currencies, primarily the dollar, pound and euro. This directly causes our reported sales to be subject to fluctuations based on changes in currency rates. To partially protect Zebra against these currency rate fluctuations, we hedge a portion of the anticipated euro-denominated sales. We estimate that foreign exchange movements of the euro and the pound versus the dollar had a negative impact of $6,540,000 on sales, net of the hedging activities, during the fourth quarter of 2008. For the full year, there was a net positive impact of the currency rate fluctuations and hedging activities of $5,586,000. See Note 16 to the Consolidated Financial Statements included in this report for a more detailed discussion of our hedging program. Printer unit volumes and average selling price information is summarized below: Total printers shipped Average selling price of printers shipped Total printers shipped Average selling price of printers shipped Three Months Ended December 31, 2008 249,902 $538 2007 235,267 $600 Year Ended December 31, 2008 972,478 $594 2007 919,909 $581 Percent Change 6.2 (10.3) Percent Change 5.7 2.2 For 2008, unit volumes increased in our midrange and mobile printer lines while unit volumes decreased in the high-end tabletop and card printer lines compared to the comparable periods in 2007. during the fourth quarter of 2008, average unit selling prices decreased in all printer product lines in large part due to the decrease in euro and pound exchange rates. Gross profit margin for SPG was affected by unfavorable changes in product mix and foreign exchange rates. Foreign currency movements, net of hedging activities, increased gross profit by $6,391,000 for the full year and decreased fourth quarter gross profit by $4,352,000. 16 Operating expense changes for SPG in 2008, compared to the same periods in 2007, are due to the following (in thousands): Three Months Ended December 31, 2008 Year Ended December 31, 2008 $(1,847) $ 3,530 Payroll and benefit costs Trade show expenses Advertising and market development fund costs Professional services cost Information technology expenses Sales meeting expenses Stock based compensation expenses Exit and restructuring costs Impairment charges Gain on sale of assets Facility relocation costs Other changes Total increases (680) (744) 578 (646) — (970) 6,005 14,680 — — (1,194) $15,182 Enterprise Solutions Group (in thousands, except percentages) Three Months Ended December 31, Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 2008 Net sales Cost of sales Gross profit Operating expenses $ 22,074 $ 16,345 8,492 13,582 163,208 8,366 7,959 8,961 Operating loss $(149,626) $ (1,002) 35.1 1.3 70.6 NM NM 100.0 100.0 38.5 61.5 739.4 (677.9) 51.3 48.7 54.8 (6.1) Year Ended December 31, 2008 Percent 2007 Change Percent of Percent of Net Sales Net Sales 2007 2008 Net sales Cost of sales Gross profit Operating expenses $ 94,241 $ 35,245 43,059 51,183 217,149 20,379 14,866 26,121 167.4 111.3 244.3 NM NM 100.0 100.0 45.7 54.3 230.4 (176.1) 57.8 42.2 74.1 (31.9) $33,273 Operating loss $(165,966) $(11,255) (1,013) 1,637 1,890 (1,794) 1,508 (2,770) 16,489 14,680 1,347 1,092 (629) The 2008 payroll and benefit cost increase includes approximately $550,000 for severance not related to the exit activities. Exit costs relate to the transfer of our printer manufacturing to a third-party manufacturer and the closure of our Warwick, Rhode Island supplies manufacturing facility. Restructuring costs relate to organization changes made in december 2008. See Note 22 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the exit and restructuring costs. Facility relocation costs relate to the move of our High Wycombe, UK facility into a new location. Impairment charges relate to the write-down of intellectual property because of changes in valuations related to current economic conditions and the business outlook. See Note 13 of the Consolidated Financial Statements included in this Annual Report on Form 10-K for a more detailed discussion of the asset impairment charges. Absent the exit and restructuring costs and impairment charges, the fourth quarter reductions in expenses reflect the cost reduction program initiated during the quarter. during 2008, we completed a sale and leaseback transaction for our manufacturing facility located in Camarillo, California. Zebra received net proceeds of $14,796,000 against a net book value of $10,669,000. Of the $4,127,000 gain, $3,006,000 was deferred and will be applied against future rental payments, and $1,121,000 was recognized in general and administrative expenses. during 2007 and 2008, Zebra acquired four companies which have been combined to make up our Enterprise Solutions Group (ESG). On January 25, 2007, we acquired WhereNet Corp., a provider of active radio frequency identification (RFId) based wireless solutions used to track and manage enterprise assets. On July 2, 2007, we acquired proveo AG, a provider of complete hardware and software systems for tracking motorized vehicles using global positioning systems (GPS). On december 14, 2007, we acquired Navis Holdings, LLC, a provider of software solutions to optimize the flow of goods through marine terminals and other operations managing cargo movement through ports and intermodal facilities. On April 1, 2008, we acquired Multispectral Solutions Inc., a global provider of ultra wideband (UWB) real-time locating systems and other UWB-based technology. Together, these companies give Zebra the ability to deliver more high-value applications that help our customers identify, track and manage assets, transactions and people. Gross profit margin for ESG in 2008 were significantly higher than in 2007 due to the margins of the software business added in late 2007, as a result of the Navis acquisition, being significantly higher than the hardware business we had in 2007. ESG results for the fourth quarter of 2008 reflect spending rates for all of the businesses acquired during 2007 and 2008 that comprise ESG. The operating expenses for ESG for all of 2008 are not comparable to the operating expenses for 2007 because the operating expenses for 2007 do not include the financial results for all of those businesses. ESG’s fourth quarter results also reflect a reduction in operating expenses during the second half of the year. These cost reduction efforts reduced ESG’s employee count by approximately 40. Operating expenses for the fourth quarter and the full year reflect a write-down of assets in the amount of $142,920,000 related to our recent ESG acquisitions and intellectual property because of changes in valuations as a result of the current economic conditions and the business outlook. 17 Increases in ESG operating expenses in 2008, compared to the same periods in 2007, are due to the following (in thousands): General operating expense increase related to business acquired Stock based compensation expenses Amortization expense Acquired in process technology Acquisition integration expenses Impairment charges WhereNet escrow claim net settlement Other changes Total increases Three Months Ended December 31, 2008 Year Ended December 31, 2008 $ 7,379 $ 41,459 912 1,408 — 1,624 142,920 — 4 $154,247 3,152 7,316 (1,853) 3,359 142,920 (5,302) (23) $191,028 Ongoing strength in international territories, with notable growth in Europe, Middle East and Africa (EMEA) of 21.0% for the full year over 2006, helped drive overall sales growth in 2007. For 2007, sales growth benefited from a 12.4% unit volume increase spread broadly across our printer product lines, offset by a decline in average unit prices. Sales growth also benefited from strong growth in service and software sales, which is a result of our recent acquisitions. Favorable foreign exchange movements added 3.9 percentage points to consolidated growth and 11.0 percentage points to growth in EMEA for the fourth quarter. Printer unit volumes and average selling price information is summarized below: Total printers shipped Average selling price of printers shipped 919,909 $581 818,413 $598 12.4 (2.8) Year Ended December 31, 2006 2007 Percent Change See Note 5 of the Notes to the Consolidated Financial Statements for further information related to the WhereNet escrow claim net settlement, Note 23 for further information related to acquisition integration costs, and Note 13 for further information related to the impairment charges. For all of 2007, printer unit volumes for nearly all printer categories increased, with notable strength in mid-range, mobile and desktop printers. For the full year, lower average selling prices across the full line of printers in addition to a mix shift toward lower priced products resulted in a 2.8% decrease in the average selling price of printers shipped. Comparison of Years Ended December 31, 2007 and 2006 Net sales Net sales by product category, related percent changes and percent of total net sales for 2007 and 2006 were as follows (in thousands, except percentages): Product Category 2007 2006 Change Year Ended December 31, Percent of Percent of Percent Total Sales Total Sales 2006 2007 Gross Profit Gross profit information is summarized below (in thousands except percentages): For the Year Ended december 31, 2007 december 31, 2006 Percent Change Gross Profit Percent of Net Sales $417,118 358,420 16.4 48.0 47.2 Hardware Supplies Service and software Shipping and handling $660,034 $578,002 161,678 150,709 42,801 6,826 25,664 6,022 Cash flow hedging activities (3,060) (873) Total net sales $868,279 $759,524 14.2 7.3 66.8 13.4 NM 14.3 76.1 18.6 4.9 0.8 (0.4) 100.0 76.1 19.8 3.4 0.8 (0.1) 100.0 Net sales to customers by geographic region, related percent changes, and percent of total net sales for 2007 and 2006 were as follows (in thousands, except percentages): The improvement in gross profit margin for 2007 was due to favorable foreign exchange movements and lower variances offset by an unfavorable product mix change. Selling and Marketing Expenses Selling and marketing expenses are summarized below (in thousands, except percentages): For the Year Ended december 31, 2007 december 31, 2006 Percent Change Selling and Marketing Expenses $121,996 96,788 26.0 Percent of Net Sales 14.1 12.7 Geographic Region 2007 2006 Change Year Ended December 31, Percent of Percent of Percent Total Sales Total Sales 2006 2007 Europe, Middle East and Africa $320,225 $264,711 Latin America Asia-Pacific Total International North America Total sales 60,090 71,871 53,619 61,374 452,186 379,704 416,093 379,820 $868,279 $759,524 21.0 12.1 17.1 19.1 9.6 14.3 36.9 6.9 8.3 52.1 47.9 34.8 7.1 8.1 50.0 50.0 100.0 100.0 Higher selling and marketing expenses in 2007 compared to 2006 were a result of increased payroll costs of $17,691,000, increased advertising and market development funding of $1,131,000, increased professional services of $472,000, and higher travel and entertainment expenses of $1,518,000. These increases were related, in part, to recent acquisitions, which increased selling and marketing expenses by $9,255,000 during 2007. 18 Research and Development Costs Research and development costs are summarized below (in thousands, except percentages): Operating Income Operating income is summarized in the following table (in thousands, except percentages): For the Year Ended december 31, 2007 december 31, 2006 Percent Change Research and Development Costs Percent of Net Sales $57,600 48,959 17.6 6.6 6.4 For the Year Ended december 31, 2007 december 31, 2006 Percent Change Operating Income $143,185 80,429 78.0 Percent of Net Sales 16.5 10.6 For 2007, research and development expenses increased as a result of increased payroll costs of $6,950,000 and higher professional services costs of $1,543,000. These increases were related, in part, to recent acquisitions, which increased research and development expenses by $7,387,000 during 2007. Non-operating Income and Expenses Zebra’s non-operating income and expense items are summarized in the following table (in thousands): Year Ended December 31, General and Administrative Expenses General and administrative expenses are summarized below (in thousands, except percentages): For the Year Ended December 31, 2007 december 31, 2006 Percent Change General and Administrative Expenses Percent of Net Sales $81,356 62,656 29.8 9.4 8.2 For 2007, general and administrative expenses increased due to higher payroll costs of $12,911,000 and higher information systems expenses of $1,546,000. These increases were related, in part, to recent acquisitions, which increased general and administrative expenses by $2,138,000 during 2007. Settlement and Licensing Agreement with Paxar Americas, Inc. during the third quarter of 2006, Zebra paid $63,750,000 to settle all issues surrounding the litigation with Paxar Americas, Inc. Of this amount, $53,392,000 was included as operating expense. The remaining $10,358,000 was capitalized as an intangible asset related to future use of patents and other licenses and are being amortized over 4 to 7 years resulting in an incremental charge of $456,000 per quarter. Insurance receivable reserve during 2006, a Zebra reseller filed for bankruptcy protection in Austria. At the time of the filing, the reseller owed various Zebra subsidiaries a total of $12,065,000. The entire balance due to Zebra had been guaranteed by Condor Insurance, a Nevis-based insurance company through a United Kingdom insurance broker. during June 2006, Zebra initiated a suit in the U.K. courts to enforce the guarantee. However, during the fourth quarter, we discovered that the insurance company’s financial position was such that it was unable to pay the judgment awarded to us. We reviewed the situation and determined that a loss is probable, and, therefore, reserved 100% of the balance due, which was $12,543,000 at december 31, 2006. Investment income Foreign exchange gains (losses) Other, net Total other income (expense) Rate of Return Analysis: Average cash and marketable securities balances Annualized rate of return 2007 $ 23,966 523 (299) $ 24,190 2006 $ 23,182 (635) (1,334) $ 21,213 $420,184 5.7% $551,714 4.2% during 2007, we began liquidating all of our interests in our partnership holdings. As a result of these liquidations, we recorded investment income of $9,246,000 related to gains on the liquidations of the partnerships during 2007. Income Taxes The effective income tax rate for 2007 was 34.2% versus 31.5% for 2006. The increase in the effective tax rate is a result of the increased impact in 2006 of permanent tax differences, including tax-exempt interest income, on the effective income tax rate due to lower taxable income as a result of the Paxar settlement. In addition, we reduced tax reserves in 2006 totaling $1,189,000 related to the completion of various state tax audits and 2005 state income tax returns. Income before Cumulative Effect of Accounting Change Zebra’s income before cumulative effect of accounting change is summarized below (in thousands, except per share amounts): Income before cumulative effect of accounting change diluted earnings per share before cumulative effect of accounting change Year Ended December 31, 2007 2006 $110,113 $ 1.60 $ 69,627 $ 0.98 19 Cumulative Effect of Accounting Change during the first quarter of 2006, Zebra adopted SFAS No. 123(R), Share-Based Payment, using the modified retrospective approach. SFAS No. 123(R) requires entities to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest. Prior to the adoption of SFAS No. 123(R), Zebra accounted for forfeitures as they occurred as permitted under previous accounting standards. The requirement to estimate forfeitures is classified as an accounting change, and SFAS No. 123(R) required a one-time adjustment in the period of adoption. The one-time adjustment (cumulative effect of accounting change) related to the change in estimating forfeitures increased income by $1,319,000, net of applicable taxes. Net Income Zebra’s net income is summarized below (in thousands, except per share amounts): Net income diluted earnings per share Year Ended December 31, 2007 $110,113 $ 1.60 2006 $ 70,946 $ 1.00 Critical Accounting Policies and Estimates Management prepared the consolidated financial statements of Zebra Technologies Corporation under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we used are reasonable, based upon the information available. Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating Zebra’s reported financial results. Revenue Recognition Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exits; (2) delivery has occurred and title has passed to the customer, which happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectibility is reasonably assured. Other items that affect our revenue recognition include: Customer Returns Customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience and any notification received of pending returns. Returns have historically been within expectations and the provisions established, but Zebra cannot guarantee that it will continue to experience return rates consistent with historical patterns. Historically, our product returns have not been significant. However, if a significant issue should arise, it could have a material impact on our financial statements. Growth Rebates Some of our channel program partners are offered incentive rebates based on the attainment of specific growth targets related to products they purchase from us over a quarter or year. These rebates are recorded as a reduction to revenue. Each quarter, we estimate the amount of outstanding volume rebates and establish a reserve for them based on shipment history. Historically, actual volume rebates have been in line with our estimates. Price Protection Some of our customers are offered price protection by Zebra as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. We estimate future payments under price protection programs quarterly and establish a reserve, which is charged against revenue. Our customers typically carry limited amounts of inventory, and Zebra infrequently lowers prices on current products. As a result, the amounts paid under theses plans have been minimal. Software Revenue We sell four types of software and record revenue as follows: • Our Enterprise Solutions Group has fixed fee software implementation projects, for which we use the percentage of completion method for revenue recognition. Under this method of accounting, we recognize revenue based on the ratio of costs incurred to total estimated costs. If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first becomes known. • Our printers contain embedded firmware, which is part of the hardware purchase. We consider the sale of this firmware to be incidental to the sale of the printer and do not attribute any revenue to it. • We sell a limited amount of prepackaged, or off-the-shelf, software for the creation of bar code labels using our printers. There is no customization required to use this software, and we have no post-shipment obligations on the software. Revenue is recognized at the time this prepackaged software is shipped. • We sometimes provide custom software as part of a printer installation project. We bill custom software development services separate from the related hardware. Revenue related to custom software is recognized once the custom software development services have been completed and accepted by the customer. • We recognize license revenue under Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”), when (1) a signed contract is obtained; (2) delivery of the product has occurred; (3) the license fee is fixed or determinable; and (4) collection is probable. Maintenance and Support Agreements We enter into post-contract maintenance and support agreements. Revenues are recognized ratably over the service period and the cost of providing these services is expensed as incurred. 20 Shipping and Handling We charge our customers for shipping and handling services based upon our internal price list for these items. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales. Zebra enters into sales transactions that include more than one product type. This bundle of products might include printers, current or future supplies, and services. When this type of transaction occurs, we allocate the purchase price to each product type based on the fair value of the individual products determined by vendor specific objective evidence. The revenue for each individual product is then recognized when the recognition criteria for that product is fully met. Investments and Marketable Securities Investments and marketable securities at december 31, 2008, consisted of the following: U.S. government securities State and municipal bonds Corporate bonds 22.5% 76.1% 1.4% We classify our debt and marketable equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities that Zebra has the ability and intent to hold until maturity. All securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of discounts or premiums. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. As of december 31, 2008, Zebra’s investments in marketable debt securities are classified as available-for-sale. In addition, as of december 31, 2008, all of our investments in marketable debt securities with maturities greater than one year are classified as long-term investments on the balance sheet due to our ability to hold them until maturity. See Note 3 in the Notes to the Consolidated Financial Statements included in this Form 10-K for the fair value discussion of auction rate security investment valuations. Accounts Receivable We have standardized credit granting and review policies and procedures for all customer accounts, including: • Credit reviews of all new customer accounts, • Ongoing credit evaluations of current customers, • Credit limits and payment terms based on available credit information, • Adjustments to credit limits based upon payment history and the customer’s current credit worthiness, 21 • An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and • Credit insurance on the majority of our international revenues. We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves varied from 0.6% to 3.3% of total accounts receivable. Accounts receivable reserves as of december 31, 2008, were $2,734,000, or 1.8% of the balance due. We feel this reserve level is appropriate considering the quality of the portfolio as of december 31, 2008. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience. Inventories We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out (FIFO) method, or the current estimated market value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements for the subsequent twelve months. Over the last three years, our inventory reserves have ranged from 5.9% to 14.2% of gross inventory. As of december 31, 2008, inventory reserves were $7,172,000, or 6.7% of gross inventory. We feel this reserve level is appropriate considering the quantities and quality of the inventories as of december 31, 2008. Valuation of Long-Lived and Intangible Assets and Goodwill We test the impairment of goodwill each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our annual assessment during June 2008 and determined that our goodwill was not impaired as of the end of May 2008. Goodwill of a reporting unit should be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include: • Significant adverse change in legal factors or in the business climate, • Adverse action or assessment by a regulator, • Unanticipated competition, • Loss of key personnel, • More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, • Testing for recoverability under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, of a significant asset group within a reporting unit, • Recognition of a goodwill impairment loss in the financial statement of a subsidiary that is a component of a reporting unit, or • Allocation of a portion of goodwill to a business to be disposed of. due to the deterioration of the economy and a significant reduction in the price of our stock, we performed an interim test of our goodwill in the fourth quarter of 2008 and determined that the goodwill associated with our ESG segment was impaired. See Note 13 of the Consolidated Financial Statements for further discussion of this impairment charge. We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of: Zebra concluded U.S. federal income tax audits for tax years 2005 and 2006, during 2008. The 2007 tax year is open to audit. As a result of the concluded audits, additional income tax expense in the amount of $758,949 was incurred. In addition, interest expense in the amount of $146,937, net of tax benefits, was incurred. These amounts are included as part of current year income tax expense. The tax years 2004 through 2007 remain open to examination by various state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits through tax years ending december 31, 2006. • Significant underperformance relative to expected historical or projected future operating results, • Significant changes in the manner of use of the acquired assets or the strategy for the overall business, • Significant negative industry or economic trends, • Significant decline in Zebra’s stock price for a sustained period, and • Significant decline in market capitalization relative to net book value. If we believe that one or more of the above indicators of impairment have occurred and the undiscounted cash flow test has failed in the case of amortizable assets, we measure impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows. during the fourth quarter of 2008, we determined that certain impairment indicators existed related to identified intangible assets in both our SPG and ESG businesses and conducted a special impairment test of intangibles. This test resulted in an impairment charge during the fourth quarter of 2008. See Note 13 of the Consolidated Financial Statements for further discussion of this impairment charge. Net intangible assets, long-lived assets and goodwill amounted to $293,078,000 as of december 31, 2008. Income Taxes On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. According to FIN No. 48, we identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. during 2008, we recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to a recent Zebra acquisition. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance at January 1, 2008 Additions based on tax positions related to the current year Balance at december 31, 2008 $ — 4,000 $ 4,000 Zebra’s continuing practice is to recognize interest and penalties related to income tax matters as part of income tax expense. Contingencies We record estimated liabilities related to contingencies based on our estimates of the probable outcomes. quarterly, we assess the potential liability related to pending litigation, tax audits and other contingencies and confirm or revise estimates and reserves as appropriate. Stock-Based Compensation As of december 31, 2008, Zebra had a general stock-based compensation plan and a stock purchase plan under which our stock was available for future grants and sales. We account for these plans in accordance with SFAS No. 123(R), Share-Based Payment. Zebra recognizes compensation costs over the vesting period of 1 month to 5 years. See Notes 2 and 4 to the Consolidated Financial Statements included in the Form 10-K for further information. Liquidity and Capital Resources As of december 31, 2008, Zebra had $224,886,000 in cash, restricted cash, and investments and marketable securities, compared with $281,179,000 at december 31, 2007. The impact of foreign currency was a significant factor in our cash flow changes in 2008. The pound exchange rate decreased from 2.00 at december 31, 2007 to 1.45 at december 31, 2008. Additional factors affecting these balances during 2008 include (note that changes discussed below include the impact of foreign currency): • Operations provided a net cash increase of $138,282,000 primarily from net income after adding back non-cash items. • Accounts receivable increased $21,891,000 with $19,227,000 of the increase resulting from the impact of foreign currency. days sales outstanding increased to 60 at the end of 2008 from 59 at the end of 2007. • Inventories increased $26,222,000 as a result of our printer manufacturing being transferred to a third-party manufacturer. Of this increase, $11,460,000 resulted from the impact of foreign currency. • Accounts payable decreased by $17,891,000 after the foreign currency impact of $22,533,000. • Deferred revenue increased $11,281,000 as a result of acquiring more long-term contracts in our ESG business. • Taxes payable decreased $1,002,000 due to the timing of tax payments made in 2008. • Purchases of property and equipment totaled $40,889,000. • Proceeds from the sale of our Camarillo facility were $14,796,000. 22 • Purchase of Multispectral Solutions Inc., totaled $18,366,000, and an increase to the purchase price of Navis, LLC, was $222,000. • Intangibles increased $1,384,000 due to payments for licenses to use patents. • Net sales of investments totaled $67,499,000. • Purchases of treasury shares totaled $157,582,000. Zebra made open market repurchases of our shares under authorizations of the Board of directors announced August 1, 2007, February 25, 2008, and October 27, 2008. • Stock option exercises and purchases under the stock purchase plan contributed $7,145,000. In February 2008, we announced that printer manufacturing is being transferred to a third-party manufacturer. This transition is expected to be completed by the end of 2009. See Note 22 to our Consolidated Financial Statements in this Annual Report on Form 10-K for further discussion. Contractual Obligations Zebra’s contractual obligations as of december 31, 2008 were (in thousands): Payments due by period Less than 1 year Total 1-3 years 3-5 years More than 5 years Operating lease obligations $ 48,463 $12,023 $18,074 $13,420 $4,946 deferred compensation liability 3,323 — — deferred revenue 24,948 18,366 6,582 Purchase obligations 66,904 66,904 — — — — 3,323 — — Total $143,638 $97,293 $24,656 $13,420 $8,269 Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily raw materials. On August 14, 2008, Zebra entered into a revolving credit agreement for a five-year $100 million revolving credit facility. The loans under this credit agreement will be available for general corporate purposes of Zebra and its subsidiaries in the ordinary course of business and other purposes permitted by the agreement. We have not yet drawn any funds under this credit agreement. Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements. Recently Issued Accounting Pronouncements In december 2007, the FASB issued SFAS No. 141(R), Business Combinations, to create greater consistency in the accounting and financial reporting of business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement applies to fiscal years beginning after december 15, 2008 and will generally affect acquisitions going forward. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. This Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Zebra does not believe this standard will have a material impact upon our consolidated financial statements. In April 2008, the FASB issued Financial Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets. This position amends the factors that should be considered in developing renewal or extension assumptions used to determine useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The position intends to improve the consistency between useful life of a recognized intangible asset under FASB 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), and other GAAP. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after december 15, 2008. Early adoption is prohibited. We have not yet determined the effect this standard will have on our consolidated financial statements. In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. Any effect of applying the provisions of this Statement shall be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting for Changes and Error Corrections. We have not yet determined the effect this standard will have on our consolidated financial statements. 23 In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-based Payment Transactions Are Participating Securities, (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. FSP EITF 03-6-1 becomes effective on January 1, 2009. We have not yet determined the effect this standard will have on our consolidated financial statements. Foreign Exchange Risk We conduct business in approximately 100 countries throughout the world and, therefore, are exposed to risk based on movements in foreign exchange rates. We generally invoice customers in their local currency and have a resulting foreign currency denominated revenue transaction and accounts receivable. We also purchase certain raw materials and other items in foreign currencies. We manage these risks using derivative financial instruments. See Note 16 of the Notes to the Consolidated Financial Statements included in this form 10-K for further discussions of hedging activities. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Zebra is exposed to the impact of changes in interest rates because of our large investment portfolio. As stated in our written investment policy, the investment portfolio is viewed as a strategic resource that will be managed to achieve above market rates of return in exchange for accepting a prudent amount of incremental risk, which includes the risk of interest rate movements. Risk tolerance is constrained by an overriding objective to preserve capital across each quarterly reporting cycle. Zebra mitigates interest rate risk with an investment policy that requires the use of outside professional investment managers, investment liquidity, and broad diversification across investment strategies, and which limits the types of investments that may be made. Moreover, the policy requires due diligence of each investment manager both before employment and on an ongoing basis. The following table sets forth the impact of a one-percentage point movement in interest rates on the value of Zebra’s investment portfolio (in thousands, except per share data). Interest rate sensitive instruments +1 percentage point movement Effect on Pretax Income Effect on diluted EPS (after tax) -1 percentage point movement Effect on Pretax Income Effect on diluted EPS (after tax) As of December 31, 2007 2008 $ (1,894) $ (0.02) $ (3,206) $ (0.03) $ 1,894 $ 0.02 $ 3,206 $ 0.03 Because these securities are classified as available-for-sale under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the impact of a one- percentage point movement in interest rates occurs over an extended period of time as investments are sold and the funds are subsequently reinvested. The following table sets forth the impact of a ten percent movement in the dollar/pound and dollar/euro rates measured as if Zebra did not engage in the selective hedging practices described above and in Note 16. It is based on the dollar/euro and dollar/pound exchange rates and euro and pound denominated assets and liabilities (in thousands, except per share data). Foreign exchange dollar/pound Effect on Pretax Income Effect on diluted EPS (after tax) dollar/euro Effect on Pretax Income Effect on diluted EPS (after tax) Euro/pound Effect on Pretax Income Effect on diluted EPS (after tax) As of December 31, 2007 2008 $ 1,620 $ 0.02 $ 579 $ 0.01 $ 4,469 $ 0.05 $ 599 $ 0.01 $ 2,195 $ 0.02 $ 3,073 $ 0.03 Equity Price Risk Zebra currently employs two investment managers. These investment funds use a variety of investment strategies, some of which involve the use of equity securities. Zebra utilizes a Value-at-Risk (VaR) model to determine the maximum potential one-day loss in the fair value of its interest rate, foreign exchange and equity price sensitive instruments. The following table sets forth the impact of a ten percent change in the value of all equity positions held by Zebra’s investment managers (in thousands, per share data). Equity price sensitive instruments +10 percent movement Effect on Pretax Income Effect on diluted EPS (after tax) -10 percent movement Effect on Pretax Income Effect on diluted EPS (after tax) As of December 31, 2007 2008 $ 25 $ 0.00 $ 1,170 $ 0.01 $ (25) $ (0.00) $ (1,170) $ (0.01) 24 From time to time, Zebra has taken direct equity positions in companies. These investments relate to potential acquisitions and other strategic business opportunities. To the extent that it has a direct investment in the equity securities of another company, Zebra is exposed to the risks associated with such investments. Item 8. Financial Statements and Supplementary Data The financial statements and schedule of Zebra are annexed to this report as pages F-2 through F-22. An index to such materials appears on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Not applicable. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Form 10-K. The controls evaluation was conducted under the supervision of our disclosure Committee, and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Office and Chief Financial Officer, have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management assessed the effectiveness of our internal control over financial reporting as of december 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control- Integrated Framework. Based on this assessment and those criteria, our management believes that, as of december 31, 2008, our internal control over financial reporting is effective. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on Zebra’s internal control over financial reporting. That report is included on page 49 of this report on Form 10-K. Changes in Internal Control over Financial Reporting In January 2008, Zebra began a program to update substantially all of its key financial systems over a three year period. The requirements for internal controls over financial reporting are a fundamental element of the design and implementation of these systems. As pieces of these systems are implemented, we conduct appropriate levels of testing and monitoring of the systems and update our internal controls over financial reporting with respect to the impacted areas. In 2008, we made additional changes to our controls and procedures as part of our ongoing monitoring of our controls. However, none of these changes has materially affected, or is reasonably likely to materially affect, and there were no other changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on the Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Zebra have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 25 Report of Independent Registered Public Accounting Firm On Internal Control over Financial Reporting The Board of directors and Stockholders of Zebra Technologies Corporation: We have audited Zebra Technologies Corporation’s internal control over financial reporting as of december 31, 2008, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Zebra Technologies Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Zebra Technologies Corporation maintained, in all material respects, effective internal control over financial reporting as of december 31, 2008, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Zebra Technologies Corporation as of december 31, 2008 and 2007, and the related consolidated statements of earnings (loss), comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended december 31, 2008, and our report dated February 27, 2009 expressed an unqualified opinion thereon. /s/Ernst & Young LLP Chicago, Illinois February 27, 2009 26 Item 9B. Other Information PART IV Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance We have adopted a Code of Ethics that applies to Zebra’s Chief Executive Officer, Chief Financial Officer and the Vice President , Finance. The Code of Ethics is posted on the Investor Relations – Corporate Governance page of Zebra’s Internet Web site, www.zebra.com, and is available for download. Any waiver from the Code of Ethics and any amendment to the Code of Ethics will be disclosed on such page of Zebra’s Web site. All other information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Election of directors,” “Executive Officers” and “Corporate Governance.” Item 15. Exhibits, Financial Statement Schedules The financial statements and schedule filed as part of this report are listed in the accompanying Index to Financial Statements and Schedule. The exhibits filed as a part of this report are listed in the accompanying Index to Exhibits. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of February 2009. ZEBRA TECHNOLOGIES CORPORATION By: /s/Anders Gustafsson Anders Gustafsson Chief Executive Officer Item 11. Executive Compensation Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has been signed below by the following persons in the capacities and on the dates indicated. The information in response to this item is incorporated by reference from the Proxy Statement sections entitled “Executive Compensation and Certain Transactions,” “Compensation discussion and Analysis,” “director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.” Signature Title /s/Anders Gustafsson Anders Gustafsson Chief Executive Officer and director (Principal Executive Officer) Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Security Ownership of Management and Certain Beneficial Owners” and “Equity Compensation Plan Information.” Item 13. Certain Relationships and Related Transactions, and Director Independence The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Certain Relationships and Related Transactions” and “Corporate Governance.” Item 14. Principal Accounting Fees and Services The information in response to this item is incorporated by reference from the Proxy Statement section entitled “Fees of Independent Auditors.” 27 /s/Gerhard Cless Gerhard Cless Executive Vice President, director /s/Michael C. Smiley Michael C. Smiley Chief Financial Officer (Principal Financial Officer) /s/Todd R. Naughton Todd R. Naughton Vice President, Finance (Principal Accounting Officer) /s/Michael A. Smith Michael A. Smith director and Chairman of the Board of directors /s/Andrew Ludwick Andrew Ludwick /s/Ross W. Manire Ross W. Manire /s/Robert J. Potter Robert J. Potter /s/Richard Keyser Richard Keyser director director director director Date February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 ZEBRA TECHNOLOGIES CORPORATION AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm INDEX TO FINANCIAL STATEMENTS AND SCHEDULE The Board of directors and Stockholders of Zebra Technologies Corporation: Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of december 31, 2008 and 2007 Consolidated Statements of Earnings (Loss) for the years ended december 31, 2008, 2007, and 2006 Consolidated Statements of Comprehensive Income (Loss) for the years ended december 31, 2008, 2007, and 2006 Consolidated Statements of Stockholders’ Equity for the years ended december 31, 2008, 2007, and 2006 Consolidated Statements of Cash Flows for the years ended december 31, 2008, 2007, and 2006 Notes to Consolidated Financial Statements Page F-1 F-2 F-3 F-3 F-4 F-5 F-6 Financial Statement Schedule The following financial statement schedule is included herein: Schedule II - Valuation and qualifying Accounts F-26 All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or related notes. We have audited the accompanying consolidated balance sheets of Zebra Technologies Corporation (the Company) as of december 31, 2008 and 2007, and the related consolidated statements of earnings (loss), comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended december 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zebra Technologies Corporation at december 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended december 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zebra Technologies Corporation’s internal control over financial reporting as of december 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2009 expressed an unqualified opinion thereon. /s/Ernst & Young LLP Chicago, Illinois February 27, 2009 F-1 December 31, 2008 December 31, 2007 December 31, 2008 December 31, 2007 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued liabilities deferred revenue Income taxes payable Total current liabilities deferred rent Other long-term liabilities Total liabilities $ 38,152 67,911 18,366 558 124,987 4,903 10,250 140,140 Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock Class A Common Stock Additional paid-in capital Treasury stock Retained earnings Accumulated other comprehensive income (loss) Total stockholders’ equity — 722 144,861 (344,147) 922,091 (12,789) 710,738 $ 42,351 69,437 9,633 751 122,172 961 8,452 131,585 — 722 141,522 (205,058) 960,512 4,995 902,693 Total liabilities and stockholders’ equity $ 850,878 $ 1,034,278 See accompanying notes to consolidated financial statements. ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ASSETS Current assets: Cash and cash equivalents Restricted cash Investments and marketable securities Accounts receivable, net of allowances of $2,734 in 2008 and $5,075 in 2007 Inventories, net deferred income taxes Prepaid expenses and other current assets Total current assets Property and equipment at cost, net of accumulated depreciation and amortization Long term deferred income taxes Goodwill Other intangibles, net Long term investments and marketable securities Other assets $ 33,267 1,639 85,654 $ 38,211 2,497 98,438 152,679 100,199 11,679 11,701 396,818 75,363 51,251 151,356 66,359 104,326 5,405 150,775 85,038 14,772 31,101 420,832 67,686 28,407 246,510 119,424 142,033 9,386 Total assets $ 850,878 $ 1,034,278 F-2 ZEBRA TECHNOLOGIES CORPORATION ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (Amounts in thousands, except per share data) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Amounts in thousands) Net sales Cost of sales Gross profit Operating expenses: Selling and marketing Research and development General and administrative Amortization of intangible assets Litigation/claim settlement Insurance receivable reserve Acquired in-process technology Exit, restructuring and integration costs Asset impairment charges Total operating expenses Operating income (loss) Other income (expense): Investment income Foreign exchange gain (loss) Other, net Total other income Income (loss) before income taxes and cumulative effect of accounting change Income taxes Income (loss) before cumulative effect of accounting change Cumulative effect of accounting change, net of income taxes of $694 (See Note 2) Year Ended December 31, 2007 2008 2006 $976,700 497,395 479,305 $868,279 451,161 417,118 $759,524 401,104 358,420 130,764 85,120 87,885 18,575 (5,302) — — 20,009 157,600 494,651 (15,346) 1,281 3,518 (1,366) 3,433 (11,913) 26,508 121,996 57,600 81,356 11,128 — — 1,853 — — 273,933 143,185 23,966 523 (299) 24,190 167,375 57,262 96,788 48,959 62,656 3,653 53,392 12,543 — — — 277,991 80,429 23,182 (635) (1,334) 21,213 101,642 32,015 (38,421) 110,113 69,627 — — 1,319 Net income (loss) $ (38,421) $ 110,113 $ 70,946 Basic earnings (loss) per share before cumulative effect of accounting change diluted earnings (loss) per share before cumulative effect of accounting change $ (0.60) $ 1.61 $ 0.99 $ (0.60) $ 1.60 $ 0.98 Basic earnings (loss) per share diluted earnings (loss) per share $ (0.60) $ (0.60) $ 1.61 $ 1.60 $ 1.01 $ 1.00 Basic weighted average shares outstanding 64,524 68,463 70,516 diluted weighted average and equivalent shares outstanding 64,524 68,908 70,956 See accompanying notes to consolidated financial statements. Year Ended December 31, 2007 2008 2006 Net income (loss) $(38,421) $ 110,113 $70,946 Other comprehensive income (loss): Foreign currency translation adjustment (22,991) 2.277 7,295 Changes in unrealized gain/(loss) on hedging transactions, net of income taxes 5,750 (5,205) (1,188) Changes in unrealized holding gains/(loss) on investments, net of income taxes (543) 1,111 Comprehensive income (loss) $(56,205) $108,296 (1,672) $75,381 See accompanying notes to consolidated financial statements. F-3 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (dollars in thousands) Balance at december 31, 2005 Repurchase of 2,080,911 shares of Class A Common Stock Issuance of 459,816 treasury shares upon exercise of stock options and purchases under stock purchase plan Additional tax benefit resulting from exercise of options Stock-based compensation Cumulative effect of accounting change Income before cumulative effect of accounting change Unrealized holding loss on investments (net of income taxes) Unrealized holding loss on hedging transactions (net of income taxes) Foreign currency translation adjustment Class A Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Retained Comprehensive Earnings Income (Loss) Total $722 $139,433 $ (64,013) $779,453 $ 2,377 $857,972 — — — — — — — — — — (72,925) — — (72,925) (7,201) 1,324 7,540 (2,013) — — — — 17,603 — — — — — — — — — — 1,319 69,627 — — — — — — — — (1,672) (1,188) 7,295 10,402 1,324 7,540 (694) 69,627 (1,672) (1,188) 7,295 Balance at december 31, 2006 $722 $139,083 $(119,335) $850,399 $ 6,812 $877,681 Repurchase of 3,038,389 shares of Class A Common Stock Issuance of 578,608 treasury shares upon exercise of stock options and purchases under stock purchase plan Additional tax benefit resulting from exercise of options Stock-based compensation Net income Unrealized holding gain on investments (net of income taxes) Unrealized holding loss on hedging transactions (net of income taxes) Foreign currency translation adjustment — — — — — — — — — (107,390) — — (107,390) (13,292) 664 15,067 — — — — 21,667 — — — — — — — — — 110,113 — — — — — — — 1,111 (5,205) 2,277 8,375 664 15,067 110,113 1,111 (5,205) 2,277 Balance at december 31, 2007 $722 $141,522 $(205,058) $960,512 $ 4,995 $902,693 Repurchase of 6,008,232 shares of Class A Common Stock Issuance of 499,576 treasury shares upon exercise of stock options and purchases under stock purchase plan Additional tax benefit resulting from exercise of options Stock-based compensation Net loss Unrealized holding loss on investments (net of income taxes) Unrealized holding gain on hedging transactions (net of income taxes) Foreign currency translation adjustment — — — — — — — — — (157,582) — — (157,582) (11,348) (275) 14,962 — — — — 18,493 — — — — — — — — — (38,421) — — — — — — — (543) 5,750 (22,991) 7,145 (275) 14,962 (38,421) (543) 5,750 (22,991) Balance at december 31, 2008 $722 $144,861 $(344,147) $922,091 $(12,789) $710,738 See accompanying notes to consolidated financial statements. F-4 ZEBRA TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Cash flows from operating activities: Cash flows from investing activities: Net income (loss) $(38,421) $110,713 $70,946 Purchases of property and equipment (40,889) (22,070) (19,197) Year Ended December 31, 2008 2007 2006 Year Ended December 31, 2008 2007 2006 Adjustments to reconcile net income (loss) to net cash provided by operating activities: depreciation and amortization Share-based compensation Asset impairment charges Impairment of investments Excess tax benefit from share-based compensation Cumulative effect of accounting change (net of tax) Gain on sale of asset Acquired in-process technology Insurance receivable reserve deferred income taxes Changes in assets and liabilities, net of businesses acquired: Accounts receivable, net Inventories Other assets Accounts payable Accrued liabilities deferred revenue Income taxes payable Other operating activities Net cash provided by operating activities 38,581 14,962 157,600 7,271 26,902 15,067 — — 16,087 7,540 — — (192) (921) (1,514) — (1,121) — — (23,138) (21,891) (26,222) (2,758) 17,891 1,429 11,281 (1,002) 4,012 — — 1,853 — (5,477) 4,453 (134) (1,321) (3,418) 16,804 (325) (1,337) (4,139) (1,319) — — 12,543 (6,737) (4,292) (13,430) (483) (1,869) 9,486 (927) 2,586 (552) Proceeds from sale of asset 14,796 — — Acquisition of businesses, net of cash acquired Acquisition of intangible assets (18,588) (1,384) (286,761) (4,800) (2,681) (18,091) Purchases of investments (723,791) (1,025,089) (1,110,472) Maturities of investments Sales of investments 592,749 198,541 915,015 366,964 757,249 374,666 Net cash provided by (used in) investing activities 21,434 (56,741) (18,526) Cash flows from financing activities: Purchase of treasury shares (157,582) (112,094) (68,221) Proceeds from exercise of stock options and stock purchase plan purchases 7,145 8,375 10,402 Excess tax benefit from share-based compensation 192 921 1,514 Net cash used in financing activities (150,245) (102,798) (56,305) Effect of exchange rate changes on cash (14,415) (18) 1,972 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $33,267 Supplemental disclosures of cash flow information: (4,944) (1,437) 15,206 38,211 39,648 $38,211 24,442 $39,648 138,282 158,120 88,065 Income taxes paid $49,092 $62,130 $ 33,070 Supplemental disclosures of non-cash transaction: Purchase of treasury shares not paid in 2006 $ — Sale of investments not received in 2007 — See accompanying notes to consolidated financial statements. $ — 21,925 $ 4,704 — F-5 ZEBRA TECHNOLOGIES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Description of Business Zebra Technologies Corporation and its wholly-owned subsidiaries (Zebra) design, manufacture, sell and support a broad range of direct thermal and thermal transfer label printers, radio frequency identification printer/encoders, dye sublimation card printers, digital photo printers and related accessories and support software. These products are used principally in automatic identification (auto Id), data collection and personal identification applications and are distributed world-wide through a network of resellers, distributors and end users representing a wide cross-section of industrial, service and government organizations. In 2007 and 2008, we acquired WhereNet Corp., proveo AG, Navis Holdings, LLC and Multispectral Solutions Inc., which we refer to as Zebra Enterprise Solutions Group (ESG). In 2008, we integrated these businesses into a single business group and are reporting their results separately from our specialty printing business. Together, these ESG companies give Zebra the ability to deliver more high-value applications that help our customers identify, track and manage assets, transactions and people. We consider these solutions natural adjacencies to our core specialty printing business. The solutions these companies provide are sold on a contract basis and are typically installed over several quarters. These contracts cover a range of services, including design, installation and ongoing maintenance services. Note 2 Summary of Significant Accounting Policies Principles of Consolidation. These consolidated financial statements were prepared on a consolidated basis to include the accounts of Zebra and its wholly-owned subsidiaries. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation. Fiscal Calendar. Zebra operates on a 4 week/4 week/5 week fiscal quarter, and each fiscal quarter ends on a Saturday. The fiscal year always begins on January 1 and ends on december 31. This results in some fiscal quarters being either greater than or less than 13 weeks depending on the days of the week those dates fall. during the 2008 fiscal year, our quarter end dates were as follows: • March 29, • June 28, • September 27, and • December 31. Use of Estimates. These consolidated financial statements were prepared using estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents. Cash consists primarily of deposits with banks. In addition, Zebra considers highly liquid short-term investments with original maturities of less than seven days to be cash equivalents. F-6 Restricted Cash. Zebra has two types of restricted cash agreements. In the Netherlands, we have an agreement with the import authorities to place €1,000,000 in a bank deposit account, which acts as security for the VAT payable. This deferment agreement allows Zebra to simply quote our deferment number at import and quickly clear customs without the need to pay VAT. The bank deposit account cannot be accessed or used without cancelling the deferment agreement. The second type of restricted cash agreement primarily collateralizes the issuance of letters of credit. Investments and Marketable Securities. Investments and marketable securities at december 31, 2008, consisted of U.S. government and agency securities, state and municipal bonds, corporate bonds, and other interests. Zebra classifies its debt and marketable equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities that Zebra has the ability and intent to hold until maturity. All securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of discounts or premiums. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. As of december 31, 2008, all of our investments and marketable securities are classified as available-for-sale securities. In addition, all investments in marketable debt securities with maturities greater than one year are classified as long-term in the balance sheet due to our ability and intent to hold them until maturity. Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable consist primarily of amounts due to us from our normal business activities. Collateral on trade accounts receivable is generally not required. Zebra maintains an allowance for doubtful accounts for estimated uncollectible accounts receivable. The allowance is based on our assessment of known delinquent accounts. Accounts are written off against the allowance account when they are determined to be no longer collectible. Inventories. Inventories are stated at the lower of cost or market, and cost is determined by the first-in, first-out (FIFO) method. Manufactured inventories consist of the following costs: component, direct labor and manufacturing overhead. Purchased inventories consist of purchased costs and purchasing overhead. Property and Equipment. Property and equipment is stated at cost. depreciation and amortization is computed primarily using the straight-line method over the estimated useful lives of the various classes of property and equipment, which are 30 years for buildings and range from 3 to 10 years for other property. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Income Taxes. On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. According to FIN No. 48, we identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. during 2008, we recognized an increase of approximately $4,000,000 in the liability for unrecognized tax benefits related to a recent Zebra acquisition. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance at January 1, 2008 Additions based on tax positions related to the current year Balance at december 31, 2008 $ — 4,000 $ 4,000 We evaluate the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that might trigger an impairment review consist of: • Significant underperformance relative to expected historical or projected future operating results, • Significant changes in the manner of use of the acquired assets or the strategy for the overall business, • Significant negative industry or economic trends, • Significant decline in Zebra’s stock price for a sustained period, and • Significant decline in market capitalization relative to net book value. Zebra’s continuing practice is to recognize interest and penalties related to income tax matters as part of income tax expense. Intangible Assets and Goodwill. Goodwill represents the unamortized excess of the cost of acquiring a business over the fair values of the net assets received at the date of acquisition. Goodwill is no longer being amortized, as required by Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. We test the impairment of goodwill each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our last annual assessment during June 2008. At that time, no adjustment to goodwill was necessary due to impairment. due to the current economic conditions, we performed an additional assessment of our goodwill during december 2008 and found the goodwill of our Enterprise Solutions Group to be impaired. As a result we recorded impairment charges related to goodwill of $113,679,000. See Note 13 for further information related to the goodwill impairment charges. Goodwill of a reporting unit should be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include: • Significant adverse change in legal factors or in the business climate, • Adverse action or assessment by a regulator, • Unanticipated competition, • Loss of key personnel, • More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, • Testing for recoverability under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, of a significant asset group within a reporting unit, • Recognition of a goodwill impairment loss in the financial statement of a subsidiary that is a component of a reporting unit, or • Allocation of a portion of goodwill to a business to be disposed of. If we believe that one or more of the above indicators of impairment have occurred and the undiscounted cash flow test has failed in the case of amortizable assets, we measure impairment by comparing the carrying value of the asset to its fair value, which is estimated using projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows. due to the current economic conditions, we performed an assessment of our identifiable intangibles during december 2008 and found the several of our identifiable intangible assets to be impaired. As a result we recorded impairment charges related to identifiable intangible assets of $43,617,000. See Note 13 for further information related to the asset impairment charges. Intangible assets consist primarily of customer relationships, current technology and patents and patent licenses. These assets are recorded at cost and amortized on a straight-line basis over a weighted-average life of 10 years, which approximates the estimated useful lives. Accumulated amortization for these other intangible assets was $23,394,000 and $24,658,000 at december 31, 2008 and 2007, respectively. Revenue Recognition. Revenue includes sales of hardware, supplies, software and services (including repair services, extended service contracts, and professional services). Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exits; (2) delivery has occurred and title has passed to the customer, which happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured. We provide for an estimate of product returns based on historical experience. Revenue related to extended warranty and service contracts is recorded as deferred income and recognized over the life of the contract. Professional services revenue is recorded when performed. Zebra enters into sales transactions that include more than one product type. This bundle of products might include printers, current or future supplies, and services. When this type of transaction occurs, we allocate the purchase price to each product type based on the fair value of the individual products determined by vendor specific objective evidence. The revenue for each individual product is then recognized when the earning process for that product is complete. Zebra records payments to resellers of its product as reductions to revenue unless these payments meet the requirements for operating expense treatment under EITF 01-09 Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). See the market development funds accounting policy for further details. F-7 Revenue includes all customer billings for shipping and handling charges. The related costs of shipping and handling revenue are recorded as cost of goods sold. quarterly based on historical warranty experience. The following table is a summary of Zebra’s accrued warranty obligation. ESG has fixed fee software implementation projects, for which we use the percentage of completion method for revenue recognition. Under this method of accounting, we recognize revenue based on the ratio of costs incurred to total estimated costs. Contract terms generally provide for progress billings on advance terms or based on completion of certain phases of the work. At december 31, 2008, unbilled revenue was $9,801,000 and receivables for contracts in progress included in accounts receivable were $11,260,000. At december 31, 2007, unbilled revenue was $8,013,000 and receivables for contracts in progress included in accounts receivable were $10,748,000. Research and Development Costs. Research and development costs are expensed as incurred. These costs include: • Salaries, benefits, and other R&D personnel related costs, • Consulting and other outside services used in the R&D process, • Engineering supplies, • Engineering related information systems costs, and • Allocation of building and related costs From time to time, Zebra will provide engineering and development services to third parties on a contract basis. Zebra does not guarantee the outcome of this research and does not retain any obligation to repay third party funding received for these contract services. Since these services are not part of our standard product offering, we treat payments received under these arrangements as reductions to research and development costs. Advertising. Advertising costs are expensed as incurred. Advertising expenses for the years ended december 31, 2008, 2007 and 2006 totaled $7,318,000, $6,361,000 and $5,857,000, respectively. Market Development Funds. Zebra makes market development funds available to its resellers to support demand generation activity by the resellers. These funds require the reseller to provide specific services or benefits to Zebra and substantiate the fair value of such. Zebra reimburses resellers for agreed activities up to the fair value of the benefit received by Zebra. These payments are treated as marketing costs consistent with the requirements of EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). Any payments to resellers that do not meet these requirements are recorded as reductions to revenue. Warranty. In general, Zebra provides warranty coverage of one year on SPG printers against defects in material and workmanship. SPG printheads are warranted for nine months and batteries are warranted for three months. Warranty coverage for most ESG hardware products is similar, with coverage periods ranging from 90 days do one year depending on the nature of the product. Battery based products, such as location tags, are covered by a 30 day warranty. For ESG software products, the warranty period is generally 90 days and provides coverage against defects in material and workmanship as well as performance materially in compliance with the accompanying documentation. A provision for warranty expense is recorded at the time of shipment and adjusted F-8 Warranty Reserve (in thousands) Balance at the beginning of the period Warranty expense during the period 2008 $ 3,411 4,094 Warranty payments made during the period (4,691) $ 2,250 6,522 (5,361) Balance at the end of the period $ 2,814 $ 3,411 $ 1,922 5,792 (5,464) $ 2,250 Year Ended December 31, 2007 2006 In the European Union, we have an obligation to recycle printers. We reserve for this obligation based on the number of new printers sold after August 13, 2005, and printers sold prior to that date that are returned to us upon our sale of a new printer to a customer. The following is a summary of Zebra’s accrued recycling obligation. Recycling Reserve (in thousands) Balance at the beginning of the period Recycling expense (reversal of reserve) during the period Recycling payments made during the period Exchange rate impact 2008 $ 3,706 Year Ended December 31, 2007 2006 $ 2,115 $ 632 (2,093) 1,580 1,373 (3) (403) — 11 — 110 Balance at the end of the period $ 1,207 $ 3,706 $ 2,115 We reexamined the environmental recycling reserves based on our three years of experience of providing for such reserves and decreased our estimate of the reserve. Therefore, we released $3,757,000 from the reserve during the second quarter of 2008. Fair Value of Financial Instruments. Zebra estimates the fair value of its financial instruments as follows: Instrument Method for determining fair value Cash, cash equivalents, restricted cash, accounts receivable and accounts payable Cost, which approximates fair value due to the short-term nature of these instruments Investments in marketable debt securities Investments in auction rate securities Foreign currency forward contracts Foreign currency option contracts Market quotes from independent pricing services Broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies Estimated using market quoted rates for foreign currency at the balance sheet date Estimated using market quoted rates for foreign currency at the balance sheet date and application of such rates subject to the option terms In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, we recognize derivative instruments and hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. See Note 16 for additional information on our derivatives and hedging activities. Stock-based Compensation. At december 31, 2008, Zebra had a general stock-based compensation plan and a stock purchase plan under which shares of our common stock was available for future grants and sales, and which are described more fully in Note 4. We account for these plans in accordance with SFAS No. 123(R), Share-Based Payment. Zebra recognizes compensation costs using the straight-line method over the vesting period of 1 month to 5 years. The compensation expense and the related income tax benefit for share-based payments was included in the Consolidated Statement of Earnings (Loss) as follows: Compensation costs and related income tax benefit: Cost of sales Selling and marketing Research and development General and administration Acquisition integration expenses Total compensation expense Income tax benefit Year Ended December 31, 2007 2008 2006 $ 1,206 $ 1,607 $ 673 2,849 2,426 8,083 398 2,977 2,316 8,167 — $ 14,962 $ 5,162 $ 15,067 $ 5,198 1,720 1,111 4,036 — $ 7,540 $ 2,556 On August 31, 2007, Zebra announced the resignation of our Chief Executive Officer (CEO) and Chairman of the Board in conjunction with our announcement of his successor as CEO. Zebra entered into an executive transition agreement with the former CEO as of that date. The agreement specifies that his outstanding unvested options vested on that date and the option exercise period will continue for the full original maximum term unaffected by his retirement. As a result, we recorded a modification charge of approximately $1,702,000 in 2007, representing the difference in fair value of the options before and after modification. Prior to adopting SFAS No. 123(R), Zebra presented all tax benefits of deductions resulting from the exercise of stock grants as operating cash flows in the consolidated statements of cash flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) to be classified as financing cash flows. Excess tax benefits classified as financing cash flows were as follows (in thousands): Excess tax benefits classified as financing cash flows $ 192 $ 921 $ 1,514 Year Ended December 31, 2007 2008 2006 SFAS No. 123(R) requires entities to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest. Prior to the adoption of SFAS No. 123(R), Zebra accounted for forfeitures as they occurred as permitted under previous accounting standards. The requirement to estimate forfeitures is classified as an accounting change, and SFAS No. 123(R) required a one-time adjustment in the period of adoption. The one-time adjustment (cumulative effect of accounting change) related to the change in estimating forfeitures increased income by $1,319,000, net of applicable taxes, for the year ended december 31, 2006. Deferred Compensation Plan. Zebra has a deferred compensation plan that permits directors, management and highly compensated employees to defer portions of their compensation. Zebra immediately pays deferred amounts into a Rabbi Trust, and plan participants select a method of investing these funds into hypothetical investments. Zebra tracks the performance of these hypothetical investments in order to determine the value of each participant’s deferral. Zebra accrues the deferred compensation liability in other long-term liabilities as the amount that is actually owed to the participants. Our deferred compensation liability was $3,323,000 as of december 31, 2008, and $3,950,000 as of december 31, 2007. Foreign Currency Translations. The consolidated balance sheets of Zebra’s foreign subsidiaries are translated into U.S. dollars using the year-end exchange rate, and statement of earnings items are translated using the average exchange rate for the year. The resulting translation gains or losses are recorded in stockholders’ equity as a cumulative translation adjustment, which is a component of accumulated other comprehensive income (loss). Acquisition Costs. Zebra periodically has external expenditures related to potential acquisitions. during 2008 and previously, these expenditures were recorded as prepaid expenses until such time as Zebra either completed the transaction or abandoned the transaction. If the transaction completed, the costs were treated as part of the cost of the acquisition. If the transaction was abandoned, the costs were expensed during the period in which it was abandoned. Beginning in 2009, Zebra will expense these costs as incurred in accordance with SFAS No. 141(R), Business Combinations. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. Zebra accounts for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. See Note 13 for further information related to impairment charges. F-9 Recently Issued Accounting Pronouncements. In december 2007, the FASB issued SFAS No. 141(R), Business Combinations, to create greater consistency in the accounting and financial reporting of business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement applies to fiscal years beginning after december 15, 2008 and will generally affect acquisitions going forward. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. This Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Zebra does not believe this standard will have a material impact upon our consolidated financial statements. In April 2008, the FASB issued Financial Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets. This position amends the factors that should be considered in developing renewal or extension assumptions used to determine useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The position intends to improve the consistency between useful life of a recognized intangible asset under FASB 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), and other GAAP. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after december 15, 2008. Early adoption is prohibited. We have not yet determined the effect this standard will have on our consolidated financial statements. In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. Any effect of applying the provisions of this Statement shall be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting for Changes and Error Corrections. We have not yet determined the effect this standard will have on our consolidated financial statements. In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-based Payment Transactions Are Participating Securities, (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. FSP EITF 03-6-1 becomes effective on January 1, 2009. We have not yet determined the effect this standard will have on our consolidated financial statements. Reclassifications. Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. F-10 Note 3 Fair Value Measurements In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 was effective for Zebra on January 1, 2008. We have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States. The adoption of SFAS No. 159 did not have a material impact on our consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 was effective for our Company on January 1, 2008. However, in February 2008, the FASB released FASB Staff Position (FSP FAS 157-2 — Effective date of FASB Statement No. 157), which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 for our financial assets and liabilities did not have a material impact on our consolidated financial statements. We do not believe the adoption of SFAS No. 157 for our non-financial assets and liabilities, effective January 1, 2009, will have a material impact on our consolidated financial statements. As defined in SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below: Level 1: quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value. Included in our investment portfolio are four auction rate security instruments, which are classified as available for sale securities and are reflected at fair value. However, due to recent events in credit markets, the auction events for the instruments held by Zebra as of december 31, 2008, have failed. Therefore, the fair values of these securities are estimated utilizing broker quotations, discounted cash flow analysis or other types of valuation adjustment methodologies as of december 31, 2008. These analyses consider, among other items, the collateralization underlying the security instruments, the credit worthiness of the counterparty, the timing of expected future cash flows, estimates of the next time the security is expected to have a successful auction, and Zebra’s intent and ability to hold such securities until credit markets improve. These securities were also compared, when possible, to other securities with similar characteristics. Of the four auction rate security instruments, Zebra deemed one item to be other than temporarily impaired. Therefore, we have recorded the market value decline in the amount of $4,374,000 for that security as an investment loss in the income statement. The decline in the market value of the other securities is considered temporary and was recorded in accumulated other comprehensive income (loss) on the balance sheet. Since Zebra has the intent and ability to hold these securities until they are sold at auction, redeemed at carrying value or reach maturity, we have classified them as long term investments in the balance sheet. Financial assets and liabilities carried at fair value as of december 31, 2008 are classified in the table below in one of the three categories described above (in thousands): Assets: Level 1 Level 2 Level 3 Level 4 The following table presents Zebra’s activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in SFAS No. 157, for the year ended december 31, 2008 (in thousands): Balance at december 31, 2007 Transfers to Level 3 Total losses (realized or unrealized): Included in earnings Included in other comprehensive income (loss) Purchases and settlements (net) Balanced at december 31, 2008 Total gains and (losses) for the period included in earnings attributable to the change in unrealized losses relating to assets still held at december 31, 2008 Auction Rate Securities $ — 12,350 (4,374) (929) — $ 7,047 $ — Available-for-sale securities $ 182,933 $ — $ 7,047 $ 189,980 Note 4 Stock Based Compensation Money market investments related to the deferred compensation plan 3,426 — — 3,426 Total assets at fair value $ 186,359 $ — $ 7,047 $ 193,406 Liabilities: Forward contracts (1) $ 2,414 $ 8,015 $ — $ 10,429 Liabilities related to the deferred compensation plan 3,323 — — 3,323 Total liabilities at fair value $ 5,737 $ 8,015 $ — $ 13,752 1) The fair value of forward contracts are calculated as follows: a. Fair value of forward collar contract associated with forecasted sales hedges are calculated using the midpoint of ask and bid rates for similar contracts. b. Fair value of regular forward contracts associated with forecasted sales hedges are calculated using the month- end exchange rate adjusted for the discount rate (3 month LIBOR rate). c. Fair value of balance sheet hedges are calculated at the month end exchange rate adjusted for current forward points unless the hedge has been traded but not settled at month end. If this is the case, the fair value is calculated at the rate at which the hedge is being settled. Based on changed conditions in the credit markets, Zebra changed our valuation methodology for auction rate security instruments as noted above during the third quarter of 2008. Accordingly, these securities changed from Level 1 to Level 3 within SFAS No. 157’s hierarchy since Zebra’s initial adoption of SFAS No. 157 at January 1, 2008. As of december 31, 2008, Zebra had a general stock-based compensation plan and a stock purchase plan under which shares of our common stock were available for future grants and sales, and which are described below. On May 9, 2006, the stockholders of Zebra approved the 2006 Zebra Technologies Corporation Incentive Compensation Plan (the 2006 Plan), which included authorization for issuance of awards of 5,500,000 shares under the 2006 Plan. The 2006 Plan became effective immediately and superseded the 1997 Stock Option Plan (the 1997 Plan) and the 2002 Non-Employee director Stock Option Plan (the 2002 director Plan), except that the prior plans will remain in effect with respect to stock options granted under the prior plans until such options have been exercised, forfeited, cancelled, expired or otherwise terminated in accordance with the terms of such grants. The types of awards available under the 2006 Plan are incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance shares and units and performance-based cash bonuses. Employees, directors and consultants of Zebra and its subsidiaries are eligible to participate in the 2006 Plan. As of december 31, 2008, 4,002,771 shares were available for grant under the plan, and options for 1,208,901 shares were outstanding under the 2006 Plan. The options granted under the 2006 Plan have an exercise price equal to the closing market price of Zebra’s stock on the date of grant. The options granted to employees generally vest over a four or five-year period. These options expire on the earlier of (a) ten years following the grant date, (b) immediately if the employee is terminated for cause, (c) ninety days if the employee is terminated involuntarily other than for cause, (d) thirty days if the employee voluntarily terminates his or her employment, or (e) one year if the employee’s employment terminates due to death, disability, or retirement. The Compensation Committee of the Board of directors administers the plan. F-11 The following table shows the number of shares granted in 2008 and the vesting schedules of the restricted stock awards that were granted under the Plan to certain executive officers and other members of management. Number of shares granted Vesting period 10,140 118,800 One half after each year of service After three years of service These restricted stock awards will vest at each vesting date if the executive remains employed by Zebra throughout the applicable time period, but will vest before the end of the each vesting period in the event of death, disability, resignation for good reason, a change in control (as defined in the 2006 Plan), or termination by Zebra other than for Cause, as defined in the restricted stock agreement entered into by Zebra with each executive officer who was granted restricted stock (the Restricted Stock Agreement). The restricted stock is forfeited in certain situations specified in the Restricted Stock Agreement, including, if before the restricted stock vests, the executive’s employment is terminated by Zebra for Cause (as defined in the Restricted Stock Agreement) or if the executive resigns for other than good reason. The 1997 Plan was superseded by the 2006 Plan. As of december 31, 2008, options for 1,609,141 shares were outstanding and exercisable under the 1997 Plan. These options expire on the earlier of (a) ten years following the grant date, (b) immediately if the employee is terminated for cause, (c) ninety days if the employee is terminated involuntarily other than for cause, (d) thirty days if the employee voluntarily terminates his or her employment, or (e) one year if the employee’s employment terminates due to death, disability, or retirement. The 2002 director Plan was superseded by the 2006 Plan. As of december 31, 2008, options for 186,068 shares were outstanding and exercisable under the 2002 director Plan. Unless otherwise provided in an option agreement, options granted under the 2002 director Plan become exercisable in five equal increments beginning on the date of the grant and continuing on each of the four anniversaries thereafter. All such options expire on the earlier of (a) ten years following the grant date, (b) the first anniversary of the termination date of the non-employee director’s directorship for any reason other than the termination of the non-employee director’s directorship by Zebra’s stockholders for cause, or resignation for cause, in each case as defined in the option agreement. In connection with Zebra’s acquisitions of Navis and WhereNet, Zebra assumed existing unvested stock options exercisable for shares of Navis’ common stock and WhereNet’s common stock, respectively, and made them options exercisable for Zebra common stock. These new options have exercises prices and vesting dates based on their previous terms. The vesting dates extend in some cases until April 30, 2011 for the Navis options and until October 23, 2010 for the WhereNet options. As of december 31, 2008, outstanding Navis and WhereNet options were exercisable for 87,277 shares and 47,787 shares, respectively. The Board of directors and stockholders adopted the 2001 Stock Purchase Plan and reserved 1,125,000 shares of Class A Common Stock for issuance under the plan. Under this plan, employees who work a minimum of 20 hours per week may elect to withhold up to 10% of their cash compensation through regular payroll deductions to purchase shares F-12 of Class A Common Stock from Zebra over a period not to exceed 12 months at a purchase price per share equal to the lesser of: (1) 85% of the fair market value of the shares as of the date of the grant, or (2) 85% of the fair market value of the shares as of the date of purchase. As of december 31, 2008, 732,051 shares have been purchased under the plan. For purposes of calculating the compensation cost consistent with SFAS No. 123(R), the fair value of each stock option granted is estimated on the date of grant using a binomial model. The following table shows the weighted-average assumptions used for stock option grants as well as the fair value of the options granted based on those assumptions (excluding the Navis and WhereNet options): Expected dividend yield Forfeiture rate Volatility Risk free interest rate 2008 0% 8.99% 37.79% 3.17% 2007 0% 7.69% 34.73% 4.55% 2006 0% 7.43% 38.30% 4.58% – Range of interest rates 0.81% - 3.87% 4.55% - 5.03% 4.38% - 4.73% Expected weighted-average life 5.09 years 4.88 years 4.58 years Fair value of options granted $7,566,000 $10,790,000 $5,802,000 Weighted-average grant date fair value of options granted (per share underlying the options) $13.33 $13.72 $14.22 The forfeiture rate is based on the historical annualized forfeiture rate, which is consistent with prior year rates. This rate includes only pre-vesting forfeitures. Volatility is based on an average of the implied volatility in the open market and the annualized volatility of Zebra’s stock prices over our entire stock history. The risk free interest rate used is the implied yield currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the options. The expected weighted-average life is based on the exercise price at the midpoint, which combines the average life of the options that have already been exercised or cancelled with the exercise life of all unexercised options. The exercise life of unexercised options assumes that the option will be exercised at the midpoint of the vesting date and the full contractual term. These assumptions are consistent with the assumptions used in prior years. The fair value of the purchase rights of all Zebra employees issued under the Stock Purchase Plan is estimated using the following weighted-average assumptions for purchase rights granted. Expected lives of three months to one year have been used along with these assumptions. Fair market value Option price Expected dividend yield Expected volatility Risk free interest rate 2008 $20.26 $17.22 0% 46% 1.87% 2007 $34.70 $29.50 0% 29% 4.57% 2006 $34.79 $29.57 0% 25% 4.54% Stock option activity for the years ended december 31, 2008, 2007, and 2006 was as follows: Fixed Options Outstanding at beginning of year Granted Exercised Forfeited Canceled Outstanding at end of year Options exercisable at end of year Intrinsic value of options exercised 2008 Weighted-Average Exercise Price $34.68 35,72 16.77 36.11 41.38 $35.83 $33.30 Shares 3,029,138 567,676 (202,204) (213,012) (42,424) 3,139,174 1,719,434 $3,138,000 2007 Weighted-Average Exercise Price $34.08 32.10 18.66 40.18 48.71 $34.68 $30.52 Shares 2,460,367 1,069,290 (332,563) (149,724) (18,232) 3,029,138 1,413,352 $6,723,000 2006 Weighted-Average Exercise Price $31.04 43.15 20.85 41.12 46.09 $34.08 $26.49 Shares 2,548,484 408,046 (375,222) (103,551) (17,390) 2,460,367 1,035,278 $8,209,000 The following table summarizes information about fixed stock options outstanding at december 31, 2008: Range of Exercise Prices $1.29-$24.21 $24.21-$36.39 $36.39-$41.25 $41.25-$46.18 $46.18-$53.92 Aggregate intrinsic value Weighted-average remaining contractual term Number of Shares 547,009 635,430 895,941 630,707 430,087 3,139,174 Options Outstanding Weighted-Average Remaining Contractual Life Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price Options Exercisable 3.70 years 4.66 years 8.55 years 7.00 years 5.26 years $18.28 29.64 38.47 44.29 49.42 483,968 451,414 135,930 364,479 283,643 1,719,434 $18.56 27.70 40.17 44.97 49.10 Options Outstanding Options Exercisable $1,511,000 6.2 years $1,252,000 4.6 years As of december 31, 2008, there was $21,418,000 of unearned compensation cost related to stock options granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.5 years. The following table (in thousands) summarized the adjusted fair values of the assets acquired and the liabilities assumed at the date of acquisition: At April 1, 2008 Note 5 Business Combinations Multispectral Solutions Inc. On April 1, 2008, Zebra acquired all of the outstanding stock of Multispectral Solutions Inc. (MSSI) for $18,366,000, which is net of cash acquired and includes transaction costs. Headquartered in Germantown, Maryland, MSSI is a global provider of ultra wideband (UWB) real-time locating systems and other UWB- based wireless technology. Zebra acquired this company to further extend our range of solutions to help our customers identify, track and manage a broader range of assets. Zebra acquired this company to further extend our range of solutions to help our customers identify, track and manage a broader range of assets. The Consolidated Statements of Earnings (Loss) reflect the results of operations of MSSI since the effective date of the purchase. The pro forma impact of this acquisition was not significant. Current assets Property and equipment Intangible assets Goodwill Total assets acquired deferred tax liability Current liabilities Net assets acquired $ 700 70 8,000 13,547 $22,317 (3,011) (940) $18,366 F-13 On a preliminary basis pending the receipt of final valuations, the purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values resulting in goodwill of $13,547,000. The intangible assets of $8,000,000 consist of the following (in thousands): Customer relationships developed technology The goodwill is not deductible for tax purposes. Amount $1,000 7,000 Useful Life 10 years 8 years Navis, LLC. On december 14, 2007, Zebra acquired all of the outstanding stock of Navis Holdings, LLC (Navis) for $144,066,000, which is net of cash acquired and transaction costs. Headquartered in Oakland, California, Navis provides solutions to optimize the flow of goods through marine terminals and other operations managing cargo in the supply chain. Zebra acquired this company to further extend our range of solutions to help our customers identify, track and manage a broader range of assets. The Consolidated Statements of Earnings (Loss) reflect the results of operations of Navis since the effective date of the purchase. The pro forma impact of this acquisition was not significant. The following table (in thousands) summarizes the adjusted fair values of the assets acquired at the date of acquisition. At December 14, 2007 Current assets Property and equipment Intangible assets Goodwill Total assets acquired Current liabilities Net assets acquired $ 25,707 2,601 58,400 76,693 $163,401 (19,335) $144,066 The purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values resulting in goodwill of $76,693,000. The intangible assets of $58,400,000 consist of the following (in thousands): Trade names Customer relationships developed technology The goodwill is deductible for tax purposes. Amount $ 2,300 39,000 17,100 Useful Life 2 years 15 years 6 years proveo AG. On July 2, 2007, Zebra acquired all of the outstanding stock of proveo AG for $20,224,000 (€14,866,000), which is net of cash acquired and transaction costs. Headquartered in Crailsheim, Germany, proveo AG provides integrated hardware and software systems that locate and track airport ground support equipment. Zebra acquired this company to further extend our range of solutions to help our customers identify, track and manage a broader range of assets. The Consolidated Statements of Earnings (Loss) reflect the results of operations of proveo AG since the effective date of the purchase. The pro forma impact of this acquisition was not significant. The following table (in thousands) summarizes the adjusted fair values of the assets acquired and the liabilities assumed at the date of acquisition. At July 2, 2007 Current assets Property and equipment Intangible assets Goodwill Total assets acquired deferred tax liability Current liabilities Net assets acquired $ 2,062 114 4,176 16,331 $22,683 (1,572) (887) $20,224 The purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values resulting in goodwill of $16,331,000. The intangible assets of $4,176,000 consist of the following (in thousands): Trade names Customer relationships developed technology – hardware developed technology – software The goodwill is not deductible for tax purposes. Amount Useful Life $ 130 1,523 1,504 1,019 1.5 years 8 years 8 years 5 years WhereNet Corp. On January 25, 2007, Zebra acquired all of the outstanding stock of WhereNet Corp., for $127,450,000, which is net of cash acquired and transaction costs. Headquartered in Santa Clara, California, WhereNet provides integrated wireless real time locating systems (RTLS) to companies primarily in the industrial manufacturing, transportation and logistics, and aerospace and defense sectors. Zebra acquired this company to add a range of solutions to help our customers identify, track and manage a broader range of assets. The Consolidated Statements of Earnings (Loss) reflect the results of operations of WhereNet since the effective date of the purchase. The pro forma impact of this acquisition was not significant. F-14 The following table (in thousands) summarizes the adjusted fair values of the assets acquired and the liabilities assumed at the date of acquisition. At January 25, 2007 $1,698,000 related to these payments. This expense was netted against the $7,000,000 received from the escrow settlement and is shown on the Consolidated Statements of Earnings (Loss) on a separate line titled litigation/claim settlement. Current assets deferred tax assets, net Property and equipment Intangible assets Goodwill Total assets acquired Current liabilities Net assets acquired $ 9,254 19,058 360 30,616 87,482 $146,770 (19,320) $127,450 The purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values resulting in goodwill of $87,482,000. The future benefit of the acquired net operating loss of $28,815,000 is included in the net deferred tax assets. The intangible assets of $30,616,000 consist of the following (in thousands): developed technology Customer relationships Backlog Acquired in-process research and development Amount $14,978 12,324 1,461 1,853 Useful Life 6 years 10 years 1 year N/A The acquired in-process research and development of $1,853,000 was written-off at the date of the acquisition in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. Acquired in-process technology is stated separately in the operating expense section of the Consolidated Statements of Earnings (Loss). The goodwill is not deductible for tax purposes. As part of the acquisition closing, an escrow balance of approximately $13,600,000 was established against the total purchase price. On January 24, 2008, Zebra filed an indemnification claim against the sellers of WhereNet for the entire escrow balance, alleging that Zebra was entitled to indemnification from the former shareholders of WhereNet as a result of, among other things, breaches of the representations and warranties in the acquisition agreement and potential third party claims. Representatives of the shareholders disputed the allegations and filed a declaratory action to obtain the escrowed funds. The dispute was settled and the complaint was dismissed in September 2008. In accordance with the settlement agreement, Zebra received $7,000,000 of the escrowed funds, and the remainder was distributed to the former shareholders and vested option holders of WhereNet pursuant to the terms of the acquisition agreement. Zebra agreed to make payments to its current employees that had been shareholders and vested option holders of WhereNet to reimburse them for their pro rata portions of any share of the escrow funds that they did not receive due to Zebra’s recoupment of amounts from the escrow funds. Accordingly, we recorded expense in the amount of Note 6 Stockholders’ Equity Share count and par value data related to stockholders’ equity are as follows: Preferred Stock Par value per share Shares authorized Shares outstanding Common Stock—Class A Par value per share Shares authorized Shares issued Shares outstanding Treasury stock Shares held December 31, December 31, 2007 2008 $0.01 10,000,000 — $0.01 10,000,000 — $0.01 150,000,000 72,151,857 60,861,592 $0.01 150,000,000 72,151,857 66,370,248 11,290,265 5,781,609 during the year ended december 31, 2008, Zebra purchased 6,008,232 shares of Zebra Class A Common Stock for $157,582,000. We reissued 499,576 treasury shares during 2008 upon exercise of stock options, purchases under the stock purchase plan and issuances of restricted stock. Stockholder Rights Agreement. Zebra’s Board of directors adopted a Stockholder Rights Agreement under which stock purchase rights were paid by dividend to stockholders of record on March 15, 2002 at the rate of one Class A Right for each outstanding share of Class A Common Stock. Each Class A Right, other than those held by the acquiring person, entitles the registered holder to purchase one ten-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, at a price of $300 per one ten-thousandth of Class A Preferred Share after the distribution date. The distribution date is 10 days after the date on which any person or group announces that it has acquired 15% or more of Zebra’s outstanding common stock or 10 days (or a later date as determined by the Board of directors) after the date on which any person or group announces or commences a tender offer that would result in the person or group becoming an owner of 15% or more of the outstanding common stock. The Rights will expire on March 14, 2012 unless that date has been extended by the Board of directors or unless the Rights are redeemed or terminated earlier. A committee of Zebra’s independent directors will review the Rights Plan at least every three years and decide whether it should continue or be revoked. Zebra generally may amend the Rights Plan or redeem the Rights at $0.001 per Right at any time prior to the time a person or group has acquired at least 15% of the outstanding common stock. F-15 Note 7 Earnings (Loss) Per Share For the years ended december 31, 2008, 2007, and 2006, earnings (loss) per share before cumulative effect of the accounting change were computed as follows (in thousands, except per-share amounts): Year Ended December 31, 2007 2008 2006 Basic earnings (loss) per share: Income (loss) before cumulative effect of accounting change Weighted average common shares outstanding Per share amount Diluted earnings (loss) per share: Income (loss) before cumulative effect of accounting change Weighted average common shares outstanding $(38,421) $110,113 $69,627 664,524 $(0.60) 68,463 $1.61 70,516 $0.99 $(38,421) $110,113 $69,627 Add: Effect of dilutive securities – stock options — diluted weighted average and equivalent shares outstanding Per share amount 64,524 $(0.60) 64,524 68,463 445 68,908 $1.60 70,516 440 70,956 $0.98 For the years ended december 31, 2008, 2007, and 2006, earnings (loss) per share after the cumulative effect of the accounting change were computed as follows (in thousands, except per-share amounts): Year Ended December 31, 2007 2008 2006 $(38,421) $110,113 $70,946 64,524 $(0.60) 68,463 $1.61 70,516 $1.01 $(38,421) $110,113 $70,946 68,463 445 68,908 $1.60 70,516 440 70,956 $1.00 Basic earnings (loss) per share: Net income (loss) Weighted average common shares outstanding Per share amount Diluted earnings (loss) per share: Net income (loss) Weighted average common shares outstanding 64,524 Add: Effect of dilutive securities – stock options — diluted weighted average and equivalent shares outstanding Per share amount 64,524 $(0.60) F-16 The potentially dilutive securities that were excluded from the earnings (loss) per share calculation consist of stock options with an exercise price greater than the average market price of the Class A Common Stock. These options were as follows: Potentially dilutive shares 2,217,940 1,561,918 1,140,689 Year Ended December 31, 2007 2006 2008 Note 8 Investments and Marketable Securities We classify our investments in marketable debt securities as available-for-sale in accordance with the classifications defined in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. As of december 31, 2008, all of our investments in marketable debt securities with maturities greater than one year are classified as long-term in the balance sheet due to our ability to hold them until maturity. SFAS No. 115 requires that changes in the market value of available-for-sale securities are reflected in the accumulated other comprehensive income (loss) caption of stockholders’ equity in the balance sheet, until we dispose of the securities. Once these securities are disposed of, either by sale or maturity, the accumulated changes in market value are transferred to investment income. On the cash flow statements, changes in the balances of available-for-sale securities are included in purchases, sales and maturities of investments under investing activities. Changes in market value of trading securities would be recorded in investment income as they occur, and the related cash flow statement includes changes in the balances of trading securities as operating cash flows. The amortized cost, gross unrealized holding gains, gross unrealized holding losses and aggregate fair value of investment securities at december 31, 2008, were as follows (in thousands): Amortized Gross Unrealized Cost Holding Gains Holding Losses Gross Unrealized Fair Value Available-for-sale: U.S. government and agency securities $ 42,842 State and municipal bonds 144,528 Corporate bonds Other 3,020 320 $190,710 $ 30 1,366 — — $ 1,366 $ (338) $ 42,534 (1,356) 144,538 (432) — 2,588 320 $ (2,126) $ 189,980 Changes in unrealized gains and losses on available-for-sale securities are included in these financial statements as follows (in thousands): Year Ended December 31, 2008 2007 2006 Changes in unrealized gains and losses on available-for-sale securities, net of tax, recorded in accumulated other comprehensive income (loss) $(543) $1,111 $(1,672) The amortized cost, gross unrealized holding gains, gross unrealized holding losses and aggregate fair value of investment securities at december 31, 2007, were as follows (in thousands): Amortized Gross Unrealized Cost Holding Gains Holding Losses Gross Unrealized Fair Value Available-for-sale: U.S. government and agency securities $ 31,989 State and municipal bonds 194,350 Corporate bonds Other Partnership interests using cost method* 3,020 38 229,397 10,933 $240,330 $ 56 899 — — $ 955 — $ 955 $ (505) $ 31,540 (289) 194,960 (20) — 3,000 38 $ (814) $ 229,538 — 10,933 $ (814) $ 240,471 *Amounts are at original cost rather than fair value due to the use of the cost method of accounting. The following table shows the number, aggregate market value and unrealized losses (in thousands) of investments with market values that were less than amortized cost as of december 31, 2008. These lower market values are caused by short-term fluctuations in interest rates and are not a reflection of the credit worthiness of the issuer. Market values are expected to recover to the amortized cost prior to maturity. Unrealized Loss < 12 months Unrealized Loss > 12 months Number of investments Aggregate Market Value Unrealized Losses Number of investments Aggregate Market Value Unrealized Losses Government securities State and municipal bonds Corporate bonds Total 2 1 1 4 $ 590 2,900 2,587 $ 6,077 $ (17) (76) (432) $ (525) 16 30 — 46 $ 9,017 24,376 — $33,393 $ (321) (1,280) — $(1,601) As of december 31, 2007, the number, aggregate market value and unrealized losses (in thousands) of investments with market values that were less than amortized cost were: Unrealized Loss < 12 months Unrealized Loss > 12 months Number of investments Aggregate Market Value Government securities State and municipal bonds Corporate bonds Total 3 5 1 9 $ 7,561 8,406 3,000 $18,967 Unrealized Losses $ (102) (3) (20) $ (125) Number of investments Aggregate Market Value Unrealized Losses 21 77 — 48 $13,599 30,986 — $44,585 $ (403) (286) — $ (689) F-17 The contractual maturities of debt securities at december 31, 2008, were as follows (in thousands): due within one year due after one year through five years due after five years through ten years due after ten years Fair Value $ 85,654 61,047 12,963 30,316 $189,980 Using the specific identification method, the proceeds and realized gains on the sales of available-for-sale securities were as follows (in thousands): Proceeds Realized gains Realized losses Net realized losses included in other comprehensive income (loss) as of the end of the prior year 2008 2007 2006 $165,177 $343,647 $337,671 376 (901) 594 (781) 215 (1,385) (441) (392) (1,041) Note 9 Related-Party Transactions Prior to August 2007, Zebra leased a building from Unique Building Corporation (Unique), an entity controlled by certain officers and stockholders of Zebra. On August 1, 2007, the building was sold to an unrelated party. Lease payments made to Unique under the lease were recorded as a component of all functional areas and were included in the consolidated financial statements as follows (in thousands): 2007 2006 Unique Operating Lease $1,358 2,336 Note 10 Inventories The components of inventories, net of allowances, are as follows (in thousands): Raw material Work in process deferred costs of long-term contracts Finished goods Total inventories December 31, 2008 2007 $ 50,015 $46,572 1,130 628 48,426 1,103 1,469 35,894 $100,199 $85,038 Inventory reserves (included in above numbers) $ 7,172 $ 8,999 F-18 Note 11 Property and Equipment Property and equipment, which includes assets under capital leases, is comprised of the following (in thousands): Buildings Land Machinery, equipment and tooling Furniture and office equipment Computers and software Automobiles Leasehold improvements Projects in progress December 31, 2008 2007 $ 1,844 $ 15,336 289 76,742 9,062 63,638 20 10,328 22,509 1,910 68,571 8,519 56,453 50 10,220 11,729 184,432 172,788 Less accumulated depreciation and amortization (109,069) (105,102) Net property and equipment $ 75,363 $ 67,686 Other items related to property and equipment are as follows: December 31, 2008 2007 Unamortized computer software costs $ 13,330 $ 10,402 Amortization of capitalized software $ 5,058 $ 4,447 $ 3,600 Total depreciation expense charged to income 20,006 15,774 12,434 Year Ended December 31, 2007 2006 2008 Note 12 Income Taxes The geographical sources of income (loss) before income taxes and cumulative effect of accounting change were as follows (in thousands): United States Outside United States Total Year Ended December 31, 2007 2008 2006 $(30,517) $142,903 $ 86,609 18,604 24,472 15,033 $ (11,913) $167,375 $101,642 Zebra’s intention is to permanently reinvest the undistributed earnings of all of our foreign subsidiaries in accordance with APB Opinion No. 23, Accounting for Income Taxes – Special Areas. Accordingly, we have not provided for deferred U.S. income taxes on undistributed earnings of foreign subsidiaries, which totaled approximately $24,261,000 at december 31, 2008. Should such earnings be remitted to Zebra, foreign tax credits would be available to substantially offset the U.S. income taxes due upon repatriation. The provision for income taxes consists of the following (in thousands): Current: Federal State Foreign deferred: Federal State Total Year Ended December 31, 2007 2008 2006 $38,149 $44,737 $29,376 5,213 7,494 (22,309) (2,039) 5,391 8,399 (1,458) 193 2,804 4,560 (3,748) (283) $26,508 $57,262 $32,709 The provision for income taxes differs from the amount computed by applying the U.S. statutory Federal income tax rate of 35% to income before income taxes. The reconciliation of statutory and effective income taxes is presented below (in thousands): Year Ended December 31, 2007 2008 2006 Provision computed at statutory rate $ (4,170) $58,582 $36,279 State income tax (net of Federal tax benefit) Tax-exempt interest income Acquired in-process technology Acquisition related items Asset impairment charges Tax benefit of exempt foreign trade income domestic manufacturing deduction Research and experimental credit Other 1,127 (1,997) — (2,450) 35,360 — (1,715) (400) 753 3,636 (4,173) 649 — — — (1,470) (400) 438 1,412 (4,378) — — — (1,365) (665) (350) 1,776 Provision for income taxes $26,508 $57,262 $32,709 The amounts in the previous two tables include the tax on the cumulative effect of accounting principle of $694,000 for 2006. deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Based on management’s assessment, it is more likely than not that the deferred tax assets will be realized through future taxable earnings. Tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands): December 31, 2008 2007 deferred tax assets: deferred rent-building Accrued vacation deferred compensation Inventory items Allowance for doubtful accounts and other receivables Other accruals FAS 123(R) stock option expense Unrealized gain on securities – FAS 115 Unrealized loss on partnership interests Unrealized loss on hedges Net operating loss carryforwards Total deferred tax assets deferred tax liabilities: Unrealized gain on hedges depreciation and amortization Total deferred tax liabilities Net deferred tax assets $ 1,817 1,717 1,576 4,358 272 3,749 18,545 275 10,154 12 21,792 64,267 — (1,337) (1,337) $ 62,930 $ 311 1,541 2,879 4,249 4,053 5,464 10,111 — 4,188 3,275 24,884 60,955 (53) (17,723) (17,776) $ 43,179 Included in the line item, acquisition related items, above is deferred tax assets related to federal and state net operating losses that resulted from the WhereNet acquisition. As of december 31, 2008, we had approximately $59,887,000 of federal net operating loss carryforwards available to offset future taxable income which expire in 2012 through 2022. As of december 31, 2008, we also had approximately $19,283,000 of state net operating loss carryforwards which expire in 2012 through 2022. Zebra’s intention is to utilize these net operating loss carryforwards to offset future income tax expense. Under the United States Tax Reform Act of 1986, the amounts of benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests. Zebra concluded U.S. federal income tax audits for the years of 2005 and 2006 during 2008. The 2007 tax year is open to audit. As a result of the concluded audits, additional income tax expense in the amount of $758,949 was incurred. In addition, interest expense in the amount of $146,937, net of tax benefits, was incurred. These amounts are included as part of current year income tax expense. The tax years 2004 through 2007 remain open to examination by various state taxing jurisdictions. Tax authorities in the United Kingdom have completed income tax audits through tax years ending december 31, 2006. F-19  Total $ 89,753 $(23,394) $144,082 $(24,658) Goodwill at december 31, 2006 Note 13 Goodwill and Other Intangible Asset Data Intangible asset data are as follows (in thousands): December 31, 2008 Gross Carrying Amount December 31, 2007 Gross Accumulated Amortization Carrying Accumulated Amount Amortization Amortized intangible assets Current technology $ 33,157 $(14,034) $ 51,700 $(13,526) Patent and other intellectual property Customer relationships 13,328 43,358 (4,448) (4,912) 31,697 60,685 (6,468) (4,664) Unamortized intangible assets Goodwill $151,356 $246,510 Aggregate amortization expense For the year ended december 31, 2007 For the year ended december 31, 2008 $ 18,575 Estimated amortization expense for the years ended: $ 3,653 december 31, 2009 december 31, 2010 december 31, 2011 december 31, 2012 december 31, 2013 Thereafter 10,364 9,181 8,915 8,307 6,855 22,737 In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we test goodwill for impairment on an annual basis or more frequently if we believe indicators of impairment exist. We performed our annual impairment test in June 2008, and determined that our goodwill was not impaired as of the end of May 2008. The performance of the test involves a two step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. F-20 due to the deterioration of the economy and a significant reduction in the price of our stock, we performed an interim test of our goodwill in the fourth quarter of 2008 and determined that the goodwill associated with our ESG segment was impaired requiring a charge of $113,679,000. The impairment charge was due to decreased sales and cash flow estimates in our ESG segment as a result of world-wide depressed economic conditions. As of december 31, 2008, these amounts are estimates and may be adjusted during the first quarter of 2009 upon completion of a detailed second step impairment analysis. Changes in the net carrying value amount of goodwill were as follows (in thousands): Acquisitions Foreign exchange impact Goodwill at december 31, 2007 Acquisitions Impairment charges Foreign exchange impact Enterprise Solutions Group $ — 175,812 — 175,812 19,289 (113,679) (585) Specialty Printing Group Total $70,714 $ 70,714 — (16) 70,698 — — (179) 175,812 (16) 246,510 19,289 (113,679) (764) Goodwill at december 31, 2008 $ 80,837 $70,519 $ 151,356 during 2008, we acquired intangible assets in the amount of $1,384,000 for patents and other intellectual property. These intangible assets have an estimated useful life of 2 to 9 years. In conjunction with our goodwill impairment testing, we also tested our identifiable intangible assets and found several of them to be impaired resulting in an additional impairment charge of $28,937,000 to our ESG segment and $14,680,000 to our SPG segment. The impairment charges in our SPG segment were related primarily to radio frequency identification. Note 14 Other Assets Other assets consist of the following (in thousands): Money market investments related to the deferred compensation plan (See Note 19) Long-term equity securities deposits Other long-term assets Total December 31, 2008 2007 $3,426 $2,795 812 957 210 270 1,549 4,772 $5,405 $9,386 Note 15 401(k) Savings and Profit Sharing Plans Zebra has a Retirement Savings and Investment Plan (the 401(k) Plan), which is intended to qualify under Section 401(k) of the Internal Revenue Code. qualified employees may participate in Zebra’s 401(k) Plan by contributing up to 15% of their gross earnings to the plan subject to certain Internal Revenue Service restrictions. Zebra matches each participant’s contribution of up to 6% of gross eligible earnings at the rate of 50%. Zebra may contribute additional amounts to the 401(k) Plan at the discretion of the Board of directors, subject to certain legal limits. Hedging of Anticipated Sales We manage the exchange rate risk of anticipated euro denominated sales using forward contracts and option collars. We designate these contracts as cash flow hedges. Gains and losses on these contracts are deferred in other comprehensive income (loss) until the contracts are settled and the hedged sales are realized, at which time the deferred gains or losses will be reported as an increase or decrease to sales. Summary financial information related to the cash flow hedges of future revenues follows (in thousands, except percentages): Zebra has a discretionary profit-sharing plan for qualified employees, to which it contributes a percentage of eligible payroll each year. Participants are not permitted to make contributions under the profit-sharing plan. Company contributions to these plans, which were charged to operations, approximated the following (in thousands): 401(k) Profit sharing Total Percentage of eligible payroll contributed for profit-sharing plan 2008 $ 4,156 1,748 $5,904 Year Ended December 31, 2007 2006 $4,203 1,599 $5,802 $2,030 1,628 $3,658 Net unrealized losses deferred in accumulated other comprehensive income (loss): Gross Income tax benefit Net Notional balance of outstanding contracts Hedge effectiveness December 31, December 31, 2007 2008 $ (32) $ (9,252) (12) (3,482) $ (20) $ (5,770) €14,680 100% €108,500 100% 1.5% 1.8% 1.8% Net gain and (losses) included in revenue $(12,354) $(3,060) Year ended December 31, 2008 2007 2006 $(873) Note 16 Derivative Instruments In the normal course of business, portions of Zebra’s operations are subject to fluctuations in currency values. We manage these risks using derivative financial instruments. Hedging of Net Assets We use forward contracts and options to manage exposure related to our pound and euro denominated net assets. We record gains and losses on these contracts and options in income each quarter along with the transaction gains and losses related to our net euro asset position. Summary financial information related to these activities follows (in thousands): Year Ended December 31, 2007 2008 2006 Change in losses from foreign exchange derivatives $(13,196) $(3,788) Gain (loss) on net foreign currency assets 16,714 Net foreign exchange gain (loss) $ 3,518 4,311 $ 523 $ (73) (562) $(635) December 31, December 31, December 31, 2006 2008 2007 Notional balance of outstanding contracts: Euro Pound Euro/Pound €18,500 £ 5,000 €17,000 € 14,000 £ 3,000 €20,500 €17,000 £ 2,660 €22,000 Net fair value of outstanding contracts $(2,414) $ (104) $ (172) The above 2008 gains and losses are the net pretax gains and losses released from other comprehensive income (loss) into earnings during these years. We expect to release pretax losses in the amount of $32,000 from other comprehensive income (loss) into earnings during 2009 along with gains and losses on similar contracts entered into early in 2009. Currently, the initial duration of our forecasted sales hedge contracts is eight months. Effectiveness testing is performed on each contract monthly. We have not experienced any gains or losses due to ineffectiveness. If we were to experience such gains or losses, we would record them as a foreign exchange gain or loss. If we were to cancel or net settle a hedge designated as a cash flow hedge prior to the scheduled settlement date, we would recognize the gain or loss on that settlement immediately as a foreign exchange gain or loss. Note 17 Commitments and Contingencies Leases. Minimum future obligations under non-cancelable operating leases as of december 31, 2008 are as follows (in thousands): 2009 2010 2011 2012 2013 Thereafter Total minimum lease payments Operating Leases $ 12,023 9,951 8,123 7,069 6,351 4,946 $48,463 F-21 Rent expense for operating leases charged to operations was as follows (in thousands): Rent expense 2008 $15,695 Year Ended December 31, 2007 2006 $10,675 $9,011 The operating lease information includes a variety of properties around the world. These properties are used as manufacturing facilities, distribution centers and sales offices. Lease terms range from one year to 17 years with breaking periods specified in the lease agreements. during 2008, Zebra entered into a sale and leaseback transaction for the building we owned in Camarillo, California. The resulting lease has a term of 30 months and the minimum monthly lease payments are $111,850 with no rent escalation clause. We are also moving our corporate headquarters from the current Vernon Hills, Illinois, location to a new location in Lincolnshire, Illinois as of March 1, 2009. The lease on this building has a term of 5 years, 4 months with minimum monthly lease payments beginning at $53,644 increasing approximately 2% per year through the end of the lease term. Letters of credit. In connection with various customer contracts, Zebra has entered into three letters of credit agreements with a bank. The contingent liability of Zebra under these agreements as of december 31, 2008 is $756,000. Revolving credit agreement. On August 14, 2008, Zebra entered into a revolving credit agreement for a five-year $100 million revolving credit facility. The loans under this credit facility will be available for general corporate purposes of Zebra and its subsidiaries in the ordinary course of business and other purposes permitted by the agreement. This credit agreement is guaranteed by certain of Zebra’s domestic subsidiaries. Loans under the agreement shall bear interest at a rate equal to the prime rate or a spread over the applicable LIBOR rate, as selected by Zebra. This spread for LIBOR-based loans is dependent on our ratio of Total debt to EBITdA, as defined in the agreement, and ranges from 0.50% to 1.25%. The spread in effect at closing for LIBOR-based loans was .50%. The credit agreement includes customary representations, warranties, affirmative and negative covenants (including, among others, restrictions on the payment of cash dividends) and events of default (and related remedies, including acceleration and increased interest rates following an event of default). It also contains financial covenants tied to Zebra’s leverage ratio and fixed charge coverage ratio. As of december 31, 2008, we had established letters of credit amounting to $456,000, which reduce the funds available for borrowing under the agreement. At that date, no amounts were outstanding under the credit agreement. Legal proceedings. On January 31, 2003, a Writ of Summons was filed in the Nantes Commercial Court, Nantes, France, by Printherm, a French corporation, and several of its shareholders (collectively, “Printherm”), against Zebra Technologies France (“ZTF”), a French corporation and wholly-owned subsidiary of Zebra. Printherm seeks damages in the amount of €15,304,000 and additional unspecified damages in connection with ZTF’s termination of negotiations in december 2000 respecting the proposed acquisition by Zebra of the capital stock of Printherm. The negotiation was terminated based on unsatisfactory results of the ongoing due diligence. We believe that Printherm’s claims are without merit and that a loss is not likely to occur. We will vigorously defend the action. Printherm filed bankruptcy proceedings on August 30, 2004, and the Commercial Court ordered its liquidation on November 30, 2004. A final hearing to consider statute of limitations and substantive arguments was held december 11, 2008. The Court is expected to enter a judgment on March 26, 2009. On April 9, 2008, a complaint was filed in the U.S. district Court for the Northern district of Illinois by Barcode Informatica, Ltd. (“Barcode”), a former Brazilian reseller, against Zebra. The complaint alleges that Zebra wrongfully terminated Barcode’s reseller status and tortiously interfered with Barcode’s alleged bid for the sale of printers to Brazilian Post. Barcode’s claim seeks an unspecified amount of damages. We believe that Barcode’s claims are without merit and we will vigorously defend the action. Note 18 Segment and Geographic Sales As a result of the acquisitions of WhereNet Corp., proveo AG, Navis Holdings, LLC, and Multispectral Solutions Inc., Zebra now has two reportable segments: Specialty Printing Group (SPG) and Enterprise Solutions Group (ESG). SPG includes direct thermal and thermal transfer label and receipt printers, passive radio frequency identification (RFId) printer/encoders, dye sublimation card printers and digital photo printers. Also included in this group is a comprehensive range of specialty supplies consisting of self-adhesive labels, thermal transfer ribbons, thermal printheads, batteries and other accessories, including software for label design and printer network management. ESG has evolved since the beginning of 2007 with the acquisitions of WhereNet Corp., proveo AG, Navis Holdings, LLC, and Multispectral Solutions Inc. The solutions that these companies provide are sold on a contract basis and are typically installed over several quarters. These contracts cover a range of services, including design, installation and ongoing maintenance services. The accounting policies for reportable segments are the same as those described in the summary of significant accounting policies except that Zebra records its federal and state deferred tax assets and liabilities in corporate and other. Intersegment sales are not significant. F-22 Segment information is as follows (in thousands): Net sales: SPG ESG Total Operating income (loss): SPG ESG Corporate and other Total Depreciation and amortization: SPG ESG Corporate and other Total Identifiable assets: SPG ESG Corporate and other Total Year Ended December 31, 2007 2006 2008 $882,459 $833,034 $759,524 94,241 35,245 — $ 976,700 $868,279 $759,524 $ 206,188 $ 213,591 $191,372 (165,966) (55,568) (11,255) (59,151) — (110,943) $ (15,346) $ 143,185 $ 80,429 $ 17,515 $ 15,542 $ 11,654 14,885 6,181 5,850 5,510 — 4,433 $ 38,581 $ 26,902 $ 16,087 December 31, 2008 2007 $ 376,515 $ 370,786 190,572 283,791 320,689 342,803 $850,878 $1,034,278 Corporate and other includes corporate administration costs or assets that support both reporting segments. Prior period amounts have been restated to conform to requirements of SFAS No. 131, Disclosures about Segments of and Enterprise and Related Information. Information regarding Zebra’s operations by geographic area is contained in the following table. These amounts (in thousands) are reported in the geographic area of the destination of the final sale. We manage our business based on these regions rather than by individual countries. 2008 Net sales Long-lived assets 2007 Net sales Long-lived assets 2006 Net sales Long-lived assets North Europe, Middle East & Africa America Latin America Asia Total $444,266 262,615 $ 358,913 28,397 $76,489 340 $97,032 1,726 $976,700 293,078 $416,093 405,903 $ 320,225 26,376 $60,090 401 $71,871 940 $868,279 433,620 $379,820 152,518 $ 264,71 8,935 $53,619 22 $61,374 695 $759,524 162,170 Net sales by major product category are as follows (in thousands): Hardware Supplies Service Shipping Cash Flow Hedging Software Handling Activities and and Total 2008 2007 2006 $704,992 $172,106 $105,113 $6,843 $(12,354) $976,700 660,034 578,002 161,678 150,709 42,801 25,664 6,826 6,022 (3,060) 868,279 (873) 759,524 Note 19 Deferred Compensation Plan Zebra offers a deferred compensation plan that permits directors and executive management employees to defer portions of their compensation and to select a method of investing these funds. The salaries that have been deferred since the plan’s inception have been accrued and the only expense, other than salaries, related to this plan is the gain or loss from the changes to the deferred compensation liability, which is charged to compensation expense. To fund this plan, Zebra purchases money market investments. Previously, Zebra purchased corporate-owned whole-life insurance contracts on the related employees, of which Zebra is the beneficiary. during 2007, the whole-life insurance policies were liquidated and money market investments were purchased. The following table shows the income, asset and liability amounts related to this plan (in thousands): Gain on cash surrender value of life insurance policies/money market interest included in investment income Year Ended December 31, 2008 2007 2006 $55 $516 $584 December 31, December 31, 2007 2008 deferred compensation liability included in other long-term liability Money market investments included in other assets $3,323 3,426 $3,950 2,795 F-23 Note 20 Other Comprehensive Income (Loss) Stockholders’ equity contains certain items classified as other comprehensive income, including: • Foreign currency translation adjustments related to our non-U.S. subsidiary companies that have designated a functional currency other than the dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, month-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustments component of other comprehensive income (loss). • Unrealized holding gains (losses) on foreign currency hedging activities relate to derivative instruments used to hedge the currency exchange rates for forecasted euro sales. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transaction occurs. See Note 16 for more details. • Unrealized gains (losses) on investments classified as available-for-sale are deferred from income statement recognition. See Note 8 for more details. The components of other comprehensive income (loss) included in the Consolidated Statements of Comprehensive Income (Loss) are as follows (in thousands): Foreign currency translation adjustments $(22,991) $ 2,277 $ 7,295 Year Ended December 31, 2007 2008 2006 The components of accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets are as follows (in thousands): Foreign currency translation adjustments Unrealized losses on foreign currency hedging activities: Gross Income tax (benefit) Net Unrealized gains and (losses) on investments classified as available-for-sale: Gross Income tax (benefit) Net As of December 31, 2008 2007 $ (12,314) $ 10,677 $ $ (32) (12) (20) $ (9,252) (3,482) $ (5,770) $ (730) $ 141 (275) $ (455) $ 53 88 Note 21 Major Customers ScanSource, Inc. is our most significant customer. Our net sales to ScanSource, Inc., an international distributor of Zebra products related to automatic identification, telephony and security, as a percentage of total net sales, were as follows: Changes in unrealized gains and (losses) on hedging transactions: ScanSource Year Ended December 31, 2007 16.5 2006 17.1 2008 15.4 Gross Income tax (benefit) Net $ 9,220 3,470 $ 5,750 $(8,346) (3,141) $ (5,205) $ (1,905) (717) $ (1,188) Changes in unrealized holding gains and (losses) on investments classified as available-for-sale: Gross Income tax (benefit) Net $ (871) $ 1,782 (328) 671 $ (543) $ 1,111 $(2,682) (1,010) $ (1,672) F-24 No other customer accounted for 10% or more of total net sales during these years. Note 22 Costs Associated with Exit or Disposal Activities during the first quarter of 2008, we initiated two different plans to close facilities. These plans are being accounted for under SFAS No. 146, Accounting for Cost Associated with Exit or Disposal Activities. All exit costs associated with these activities are identified on a separate line of our Consolidated Statement of Earnings (Loss), as part of operating expenses. These plans are intended to reduce costs and improve manufacturing efficiency. In January 2008, we initiated a plan to close our supplies manufacturing plant in Warwick, Rhode Island. This plant’s operations were transferred to a new facility in Flowery Branch, Georgia, which is now our East Coast supplies manufacturing facility. This transition was completed during the second quarter. We do not expect to incur any further costs associated with this plan. Costs incurred through december 31, 2008 were (in thousands): Type of Cost Severance, stay bonuses, and other employee-related expenses Other exit costs Total $341 261 $602 In February 2008, we announced plans to establish regional distribution and configuration centers, consolidate our supplier base, and transfer final assembly of thermal printers to Jabil Circuit, Inc., a global third-party electronics manufacturer. These actions are intended to optimize our global printer product supply chain by improving responsiveness to customer needs and increasing Zebra’s flexibility to meet emerging business opportunities. As a result, all printer manufacturing in our Vernon Hills, Illinois and Camarillo, California will be transferred to Jabil’s facility in Guangzhou, China. This transition is expected to be completed by the end of 2009. As of december 31, 2008, we have incurred and expect to incur the following exit costs (in thousands): All current exit costs are included in operating expenses for the Specialty Printing Group under the line item exit, restructuring and integration costs. Also included in the line item exit, restructuring and integration costs, are costs related to an integration project to combine our most recent acquisitions of WhereNet Corp., proveo AG, Navis, LLC, and Multispectral Solutions, Inc., to form the Enterprise Solutions Group. As a result, Zebra incurred $3,359,000 in acquisition integration expenses, primarily severance costs during 2008, which are included in operating expenses as a separate line item. Cost incurred as of December 31, 2008 Additional cost expected Total costs expected to be incurred Note 23 Quarterly Results of Operations (unaudited) (Amounts in thousands, except per share data) Type of Cost Severance, stay bonuses, and other employee-related expenses Professional services Relocation and transition costs $ 4,308 $ 1,612 $ 6,000 5,425 3,662 — 10,459 5,425 14,121 2008 Net sales Total $ 13,395 $ 12,151 $ 25,546 Cost of sales Gross profit Selling and marketing Research and engineering General and administrative Amortization of intangibles Claim settlement Exit, restructuring and integration costs Asset impairment charges First Quarter $ 246,277 123,362 122,915 30,861 19,907 25,045 4,514 — 3,234 — Second Quarter Third Quarter $ 253,782 $ 244,073 126,067 126,287 127,715 117,786 34,322 22,849 33,148 21,711 24,216 4,679 18,534 4,711 — (5,302) 4,680 — 90,746 4,304 — 77,106 Fourth Quarter $ 232,568 121,679 110,889 32,433 20,653 20,090 4,671 — 7,791 157,600 243,238 during december 2008, Zebra made various organization changes in order to reduce costs. Affected employees received both severance and outplacement services. The total cost of this action was $2,653,000 and was expensed in the fourth quarter of 2008. No future costs related to these organizational changes are expected to be incurred. Liabilities and expenses related to exit activities for the year ended december 31, 2008, were as follows (in thousands): Severance, stay bonuses, and other employee-related expenses Relocation and transition Professional services Other costs exit costs Total Total operating expenses 83,561 Accrued liabilities related to exit activities at december 31, 2007 Expenses incurred for the nine months ended September 27, 2008 Expenses incurred for the three months ended december 31, 2008 Expenses incurred for the year ended december 31, 2008 Less: Amounts paid for the year ended december 31, 2008 Accrued liabilities related to exit activities at december 31, 2008 $ — $ — $ — $ — $ — 3,542 4,294 2,425 223 10,484 3,760 1,131 1,237 38 6,166 7,302 5,425 3,662 261 16,650 Operating income (loss) 39,354 36,969 40,680 (132,349) Investment income (loss) Foreign exchange gain (loss) Other, net 2,405 700 (254) 2,722 (69) (651) (5,141) 247 (184) Total other income (loss) 2,851 2,002 (5,078) 1,295 2,640 (277) 3,658 Income (loss) before taxes Income taxes 42,205 14,561 38,971 35,602 (128,691) 13,445 9,832 (11,330) Net income (loss) $ 27,644 $ 25,526 $ 25,770 $ (117,361) (1,107) (5,333) (3,610) (222) (10,272) diluted earnings (loss) per share $ Basic earnings (loss) per share $ 0.42 0.42 $ $ 0.39 0.39 $ $ 0.40 0.40 $ $ (1.88) (1.88) $ 6,195 $ 92 $ 52 $ 39 $ 6,378 F-25 Fourth Quarter $ 233,573 120,275 113,298 35,683 15,642 21,854 3,257 — 76,436 36,862 8,545 553 231 9,329 46,191 15,388 ZEBRA TECHNOLOGIES CORPORATION Schedule II Valuation and Qualifying Accounts (Amounts in thousands) Description Balance at Charged to Beginning Costs and Deductions/ (Recoveries) Expenses of Period Balance at End of Period Valuation account for accounts receivable: Year ended december 31, 2008 $ 5,075 $ 1,061 $ 3,402 $ 2,734 Year ended december 31, 2007 Year ended december 31, 2006 Valuation accounts for inventories: Year ended december 31, 2008 Year ended december 31, 2007 Year ended december 31, 2006 3,549 1,116 $ 8,999 9,866 7,598 330 (1,196) 5,075 2,856 423 3,549 $ 6,907 8,800 8,951 $ 8,734 $ 7,172 9,667 8,999 6,683 9,866 See accompanying report of independent registered public accounting firm. 21,694 2,928 — 67,606 37,022 4,393 (23) (230) 4,140 41,162 14,201 2007 Net sales Cost of sales Gross profit First Quarter $ 208,576 108,786 Second Quarter Third Quarter $ 208,912 $ 217,218 109,510 112,590 99,790 99,402 104,628 Selling and marketing Research and engineering General and administrative Amortization of intangibles Acquired in-process technology 28,164 14,185 17,933 2,323 1,853 29,069 29,080 13,869 13,904 19,875 2,620 — Total operating expenses 64,458 65,433 Operating income 35,332 33,969 Investment income Foreign exchange gain (loss) Other, net Total other income Income before taxes Income taxes Net income 5,304 175 76 5,555 40,887 14,171 5,724 (182) (376) 5,166 39,135 13,502 $ 26,716 $ 25,633 $ 26,961 $ 30,803 Basic earnings per share diluted earnings per share $ $ 0.39 0.39 $ $ 0.37 0.37 $ $ 0.39 0.39 $ $ 0.46 0.45 F-26 Board of directors Officers Stockholder information Michael A. Smith, Chairman (1, 2, 3) Chairman and Chief Executive Officer FireVision, LLC Anders Gustafsson Chief Executive Officer Zebra Technologies Corporation Gerhard Cless Executive Vice President Zebra Technologies Corporation Richard L. Keyser (2) Chairman W. W. Grainger, Inc. Andrew K. Ludwick (1) Private Investor Ross W. Manire (1, 3) Chairman and Chief Executive Officer Clearlinx Network Corporation Dr. Robert J. Potter (2) President and Chief Executive Officer R.J. Potter Company Anders Gustafsson Chief Executive Officer Gerhard Cless Executive Vice President Noel Elfant Vice President, General Counsel and Corporate Secretary Hugh K. Gagnier Senior Vice President, Operations Specialty Printing Solutions Philip Gerskovich Senior Vice President, Corporate Development Todd R. Naughton Vice President, Finance Michael C. Smiley Chief Financial Officer Michael H. Terzich Senior Vice President, Sales and Marketing Specialty Printing Solutions (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Nominating Committee Joanne Townsend Vice President, Human Resources William J. Walsh Senior Vice President, General Manager Zebra Enterprise Solutions Investor Relations Please contact Zebra’s Corporate Headquarters for corporate or product information. Form 10-K You may receive a free copy of the Zebra Technologies Corporation Form 10-K Report filed with the Securities and Exchange Commission by contacting the Investor Relations Department at the Corporate Headquarters. Web Site Investors are invited to learn more about Zebra Technologies Corporation by accessing the company’s Web site at www.zebra.com. Equal Employment Opportunities/Affirmative Action It is the policy of Zebra Technologies Corporation to provide equal opportunities and affirmative action in all areas of its employment practices without regard to race, religion, national origin, sex, age, ancestry, citizenship, disability, veteran status, marital status, sexual orientation or any other reason prohibited by law. Corporate Headquarters Zebra Technologies Corporation 475 Half Day Road, Suite 500 Lincolnshire, Illinois 60069 U. S. A. Phone: +1 847 634 6700 Fax +1 847 913 8766 Annual Meeting Zebra’s Annual Meeting of Stockholders will be held on May 21, 2009, at 10:30 A.M. (Central Time), at the Hilton Northbrook, 2855 North Milwaukee Avenue, Northbrook, Illinois. Independent Auditors Ernst & Young LLP Chicago, Illinois Transfer Agent and Registrar BNY Mellon Shareowner Services P.O. Box 358015 Pittsburgh, PA 15252-8015 Overnight Delivery 480 Washington Boulevard Jersey City, NJ 07310-1900 Zebra Toll Free: 877 870-2368 TDD for hearing impaired: 800 231-5469 Foreign Shareowners: 201 680-6578 TDD for Foreign Shareowners: 201 680-6610 Web Site address: Shareowner accounts: www.bnymellon.com/shareowner/isd General transfer agent: www.bnymellon.com/shareowner E-mail contact: shrrelations@bnymellon.com G L O B A L / A M E R I C A S H E A D Q U A R T E R S E U R O P E , M I D D L E E A S T A N D A F R I C A H E A D Q U A R T E R S A S I A P A C I F I C H E A D Q U A R T E R S Zebra Technologies Corporation Zebra Technologies Europe, Limited Zebra Technologies Asia Pacific, L.L.C. 475 Half Day Road Suite 500 Lincolnshire, IL 60069 USA +1 847 634 6700 www.zebra.com Dukes Meadow Millboard Road Bourne End Buckinghamshire SL8 5XF, UK + 44 (0) 1628 556000 120 Robinson Road #06-01 Parakou Building Singapore 68913 + 65 6858 0722 

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